Berlin Working Papers on Money, Finance, Trade and Development

In cooperation with

Working Paper No. 01/2013

Can the Mauritian Miracle continue?

The role of financial and ICT services as prospective growth drivers

Arielle Joseph and Bernhard Troester

April 2013

Can the Mauritian Miracle continue? - The role of financial and ICT services as prospective growth drivers

Arielle Joseph* and Bernhard Troester†

Hochschule für Technik und Wirtschaft Berlin (HTW) –

University of Applied Sciences

Berlin, April 2013

* Arielle Joseph is the holder of a Master of Arts in International and Development Economics from the HTW Berlin. As a national of Trinidad and Tobago, her professional career has been focused on both social and market research within her home region of the Caribbean. † Bernhard Troester has a Master of Science in Economics with Honors from the University of Regensburg, Germany. Additionally, he completed his Master of Arts in International and Development Economics at the HTW in Berlin. His working experience stretches from the financial sector in Germany and UK to a research institution for development in Austria. Currently, he participates in the doctoral program in economics and social science of the Vienna University of Economics and Business.

Abstract This paper presents the prospective sectors for further economic growth in Mauritius. We

approach this by firstly tracing the historical development of Mauritius and providing

explanations for the growth experienced. This is used as the basis for the analysis of the

country’s current economic situation from which we infer that future growth may not be as

promising as the historical growth path, thereby, implying that there may be a real threat of

the ‘middle income trap’. However, through the analysis of the current situation two potential

strategic growth sectors are identified: financial intermediation and information and

communications technology. These two sectors are presented with their main components

and their present and prospective contribution to economic growth in Mauritius is explored.

Our conclusion from the discussion presented is that, although, the growth prospects are clear

for the two identified sectors, their impact might be limited and the hindrance to further

economic growth may extend beyond these two strategic sectors. Ultimately, it is the

continued current account deficit and key structural problems which can severely impact the

sustainable growth of the island state.

Dedication Several individuals and organizations have given invaluable contributions to this paper. The

authors benefited from the general instruction and guidance from Prof. Dr. Jan Priewe of

HTW Berlin, whose critical input provided useful suggestions and comments. The

department of Economics and Statistics at the University of Mauritius, our hosting academic

institute and its faculty members Prof. Dr. Sanjeev Sobhee and Dr. Verena Tandrayen-

Ragoobur provided the additional local academic and administrative support to facilitate the

research process. Useful comments were provided by various national agencies, whose

representatives willingly gave information and offered further assistance, namely, The Board

of Investment, Mauritius Chamber of Commerce, National Computer Board, Mauritius

Commercial Bank, The Ministry of ICT, The Financial Services Commission and Statistics

Mauritius. Furthermore, the authors are grateful to the numerous individuals who assisted at

the academic, administrative and financial level to make this paper a reality.

Table of Contents

Abbreviations and Acronyms ................................................................................................... iv

List of Figures ........................................................................................................................... vi

List of Tables ........................................................................................................................... vii

I. Introduction ............................................................................................................................ 1

II. Historical development path .................................................................................................. 2

1. Phases of economic development ...................................................................................... 4

2. Explaining the economic development ............................................................................ 12

III. Analysis of current economic situation.............................................................................. 21

1. Recent developments since 2005 ..................................................................................... 21

2. Current sector distribution and potential growth sectors ................................................. 25

IV. The potential middle income trap ...................................................................................... 31

V. Evaluation of the potential growth sectors .......................................................................... 36

1. The financial sector .......................................................................................................... 36

i. The history of the financial sector ................................................................................. 37

ii. The recent developments and current structure ............................................................ 41

iii. SWOT Analysis........................................................................................................... 52

iv. Potential growth strategies .......................................................................................... 55

v. Conclusion .................................................................................................................... 59

2. The Information and Communication Technology Sector .............................................. 60

i. The history of the ICT sector......................................................................................... 61

ii. Overview and current structure .................................................................................... 69

iii. SWOT Analysis........................................................................................................... 82

iv. Conclusion ................................................................................................................... 87

V. Conclusion .......................................................................................................................... 88

Bibliography ............................................................................................................................ 90

iv

Abbreviations and Acronyms

AGOA African Growth and Opportunity Act AMSP Accompanying Measures for Sugar Protocol countries BoM Bank of Mauritius BOP Balance of Payments BPO Business Process Outsourcing CPIS Coordinated Portfolio Investment Survey CSO Central Statistical Office (Mauritius) CT Communication Technology DC Development Certificate DTAT Double Taxation Avoidance Treaty EAP East Asian Pacific EASsy Eastern African Submarine Cable System EEC European Economic Community EPZ Export Processing Zone FDI Foreign Direct Investment FSC Financial Service Commission GCB Global Business Category GDFCF Gross Domestic Fixed Capital Formation GDP Gross Domestic Product GSP Generalized scheme of preferences HDR Human Development Report HNWI High-Net-Worth Individuals ICT Information and Communication Technology ICTA Information and Communication Technology Authority IDI ICT Development Index IFI International Financial Institution IIP International Investment position IMF International Monetary Fund IHS Investment in Hotel Schemes IRS Integrated Resort Schemes IT Information Technology ITES Information Technology Enabled Services ITO Information Technology Outsourcing ITS Information Technology Services JEC Joint Economic Council KPO Knowledge Process Outsourcing LION Lower Indian Ocean Network MAAS Mauritius Multi-Annual Adaptation Strategy MBA Mauritius Bankers Association MCB Mauritius Commercial Bank MEF Mauritius Employers' Federation MFA Multi-Fiber Arrangement MFPA Mauritian Freeport Authority MICT Ministry of Information and Communication Technology MITIA Mauritius IT Industry Association MOBAA Mauritian Offshore Business Activities Authority MRC Mauritius Research Council

v

NCB National Computer Board NICTSP National Information and Communication Technology

Strategic Plan NRI Networked Readiness Index NSIC Rev 2 National Standard Industrial Classification Revision 2 OTAM Outsourcing and Telecommunications Authority of Mauritius PPP Purchase Power Parity RES Real Estate Schemes SAFE South Africa Far East Submarine Fiber Optic Cable SAT3/WASC South Atlantic3/West Africa Submarine Cable SBM State Bank of Mauritius SDR Special Drawing Rights SSA Sub-Saharan Africa TFP Total Factor Productivity WDI World Development Indicator WEO World Economic Outlook WTO World Trade Organization

vi

List of Figures Figure 1: GDP Growth in Mauritius 1968 to 2012 .................................................................... 3Figure 2: The Economic Trajectory of Mauritius ...................................................................... 5Figure 3: Employment and share in GDP in EPZ sector ......................................................... 11Figure 4: Contribution of the Three Components of GDP by Expenditure Approach to the Growth of GDP in % (1977 to 2005) ....................................................................................... 17Figure 5: Real exports of goods, index (2005=100) ................................................................ 22Figure 6: Exports of goods and services .................................................................................. 23Figure 7: Net exports of goods and services ............................................................................ 23Figure 8: Bird's Eye View on GDP Distribution 2012 ............................................................ 26Figure 9: Share of real GDP versus share of GDP growth (2009 to 2012) ............................. 27Figure 10: Total FDI inflows in current USD .......................................................................... 28Figure 11: FDI Inflows by sectors, in million MRs ................................................................. 28Figure 12: Building and construction work prices, index (1999=100) .................................... 29Figure 13: GDP Growth and Current account balance 1976 to 2011 ...................................... 34Figure 14: Percentage contribution to GDP by financial intermediation ................................ 36Figure 15: Total Assets of Banks in Mauritius in billion MURs and as share of GDP in % (right axis) 1995 to 2000 .......................................................................................................... 39Figure 16 : The Mauritian financial sector .............................................................................. 43Figure 17 Total Assets of Banks in Mauritius in billion MURs, 2000 to 2011* ..................... 44Figure 18: Total Assets of Banks in Mauritius as share of GDP in % ..................................... 44Figure 19: Capital Adequacy Ratio Mauritian Banking Sector* ............................................. 45Figure 20: Wealth of HNWIs by regions in trillion USD ........................................................ 56Figure 21: Wealth Management Value Chain ......................................................................... 57Figure 22: Core elements of the ICT enabling environment ................................................... 63Figure 23: Trend of ICT access in Mauritius from 2004 to 2011(per 100 inhabitants) .......... 67Figure 24: Supply and potential supply of graduates (right axis) for the ICT industry 2006 to 2011.......................................................................................................................................... 68Figure 25: Value added in ICT Sector as % GDP and growth rate of ICT sector ................... 71Figure 26: ICT exports as a % of total exports ........................................................................ 73Figure 27: The Mauritian ICT sector ....................................................................................... 74Figure 28: Export of ICT Goods and Services 2004 vs. 2011 ................................................. 75Figure 29: Number of Firms in ITES/ITS segment ................................................................. 77Figure 30: ITES/ITS hierarchy ................................................................................................ 78Figure 31: Segmentation of the ICT-BPO sector based on number of firms for selected years 2006, 2011, 2012...................................................................................................................... 78

vii

List of Tables

Table 1: Average Real GDP growth rates 1970 - 2005 ............................................................. 3Table 2: Percentage distribution to GDP by industry group .................................................... 12Table 3: The influence of sugar on real growth rate of GDP ................................................... 14Table 4: Percentage distribution of GDP by industry group 2005 to 2012 ............................. 24Table 5: Decomposition of real GDP growth (in percentage points) ...................................... 33Table 6: Financial sector by functional groups (number of companies as of 2010) ................ 42Table 7: Number of registered Global Business Companies ................................................... 48Table 8 : CPIS Total Portfolio Stocks in million USD ............................................................ 50Table 9: SWOT diagram financial sector ................................................................................ 52Table 10: Value added of the ICT Sector (in Million MURs) ................................................. 71Table 11: Employment in ICT sector....................................................................................... 72Table 12: Telecommunications service providers ................................................................... 76Table 13: Employment in ICT-BPO Sector 2004 to 2022 ....................................................... 80Table 14: SWOT diagram ICT sector ...................................................................................... 82

1

I. Introduction

The Republic of Mauritius, an island state in the Indian Ocean and allocated to the

geographical region of Africa is an exceptional example of a successful development path.

Characterized by the transition from a purely sugar exporting economy to a now service

sector dominated economy, Mauritius became a prominent object of investigation for

economists. In accordance with the well-known growth story of several East Asian

economies, some name the economic development of the island the “Mauritian miracle”.

Undoubtedly, given initial conditions around the time of independence in 1968, a positive

outlook for the Mauritian development was hardly foreseeable. Factors like the geographical

remoteness, ethnic fragmentation and potential conflicts, the population density and the

monocrop economy are usually associated with limited GDP growth prospects. Furthermore

Mauritius does not possess natural resources like other countries in Sub-Saharan Africa

(SSA). However, the impressive development of the small economy proved all skeptics

wrong, among them the Nobel Prize winners V.S. Naipaul and James Meade. Pushed by the

preferential income from sugar exports and smart trade policies, textile production and

tourism could be initiated already in the 1970s. Later on, a financial banking and offshore

center and the sector for information and communication technology (ICT) were established

as the third and fourth pillar of the Mauritian economy. Today the economic structure is even

more diversified including sectors like real estate, health activities and seafood. An indicator

for the successful development is the ranking in World Bank’s Ease of Doing Business Index

which lists Mauritius as number 19 out of 185 countries in 2012.1

However, the economic growth prospects for the upcoming years might not be as bright as

the past experience. Globally, this slowdown in GDP growth rates at a certain level of per

capita income is known as the ‘middle-income trap’. In the case of Mauritius, the country

might have taken the right measures to counteract this trap, but the real threat for growth

stagnation might be the contraction of goods exports in the 2000s and the associated balance

of payment constraints. Nevertheless, Mauritius wants to benefit from its geographical

location between Asia and Africa and its historical achievements and sees its growth potential

as a hub for financial and communication services. Hence, the growth prospects of these two

strategic sectors, financial industry and ICT, will be analyzed in this paper.

1 Doing Business – Economy Rankings, accessed January 2013, <http://www.doingbusiness.org/rankings>

2

The outline of this paper is as follows. We start with the historical development path of

Mauritius from its independence in 1968 to 2005. The reasons for the exceptional economic

growth will also be highlighted in chapter II. Thus, we have a detailed look at the current

economic situation from 2005 to 2012 and identify the sectors that were drivers of growth

during that period (chapter III). In chapter IV, the risk of a potential middle-income trap is

discussed with regard to the latest economic condition before the two strategic sectors, the

financial industry and the ICT sector are evaluated in terms of their potential as future growth

drivers of the Mauritian economy (chapter V.) Finally, a summary of our findings and a

conclusion is provided in chapter VI.

II. Historical development path

The initial factor for the development of Mauritius is still visible everywhere on the island:

sugar cane. Introduced by Dutch traders who discovered the uninhabited island in 1639, the

climatic conditions in Mauritius turned out to be very favorable for this plant. The expansion

of the sugar industry was supported by all following colonial powers, the French and the

British. Although in the early 1960s the industrial processes, management and research in this

particular sector were modern and highly developed, other agricultural goods and

manufacturing merely existed or were at a primitive stage of development. In a report for the

Governor of Mauritius, the British Nobel Prize winner James Meade (1961, p.14) stated that

“…no other country in the world […] is so exclusively dependent upon the export of one

single product”, as sugar accounted for 99 per cent of exports and 35 per cent of the national

income at that time. Due to the massive population growth (46 per cent between 1944 and

1958), the multi-ethnic composition and the monocrop based economy, Meade (1967, p.250)

made his often cited statement about the poor outlook for a peaceful development of

Mauritius. However, Meade emphasized in his early report the need for economic

diversification in order to absorb the increasing labor force and to avoid potential social

tensions. His recommendations can be seen as the initial impulse for the transformation of the

Mauritian economy.

Indeed, the GDP growth performance of the Mauritian economy since its independence in

1968 is impressive (see Figure 1).

3

Figure 1: GDP Growth in Mauritius 1968 to 2012

Source: MEF and CSO data, National Accounts

Starting from 217 current US Dollars in 1968, the GDP per capital increased to 8,755 US

Dollars in 2011. During that period, the real GDP growth rate averaged 5.2 per cent.

Especially between 1984 and 2001, Mauritius experienced real GDP growth rates of more

than 6.0 per cent on average. In comparison, Mauritius’ GDP per capita measured in PPP

terms (current international dollar) more than seven-folded since 1980 while Sub-Saharan

Africa (SSA) economies’ GDP had not even doubled. Mauritius is now classified as an

upper-middle income country with the fifth highest GDP per capita (PPP, current

international dollar) in SSA (WDI database). Mauritius’ GDP growth rates also exceeded the

global average and even the growth rates in East Asian Pacific countries especially in the

1990s (see Table 1).

Table 1: Average Real GDP growth rates 1970 - 2005

* 2000 to 2005 only

Sources: MEF, CSO and WDI

Besides the economic success, Mauritius achieved improvements in human development.

Between 1980 and 2011, indicators such as life expectancy (from 67.1 to 73.4 year) and

combined gross enrolment in education (from 32.1 to 76.2 per cent) improved significantly

1970s 1980s 1990s 2000s * Mauritius 6.8% 4.2% 5.3% 4.7% World 3.9% 3.1% 2.7% 3.0% Sub-Saharan Africa 4.1% 2.1% 2.1% 4.4%

Upper middle Income 5.8% 3.2% 3.4% 5.5%

East Asian Pacific 4.6% 4.9% 3.2% 3.6%

4

(International Human Development Indicators2). Inequality measures like the Gini-coefficient

fell simultaneously from 0.5 in 1962 to 0.38 in 20083 (Zafar, 2011). Consequently, the

Human Development Index improved from 0.525 to 0.728 between 1980 and 2011 and

Mauritius climbed 22 ranks up to number 77 out of 187 countries in 2011 (International

Human Development Indicators).

1. Phases of economic development

A review of the economic development of Mauritius provides insights into the determinants

of growth. Starting in 1960, roughly every decade is characterized by emergence, maturing

or downturn of specific sectors. For instance, the textile industry was established in the early

1970s and boomed in the two consecutive decades before the growth declined after 2001.

Figure 2 illustrates the path of diversification from a monocrop economy to a business

platform dominated by service sectors.

The 1960s: Initial steps for transition

With the upcoming independence of Mauritius from the United Kingdom (UK), the outlook

for Mauritius in the early 1960s was challenging. It was unlikely that the dominating sugar

industry would be able to absorb the impending increase in total labor force caused by high

birth rates and the successful fight against malaria in the preceding decades. Based on a

report by James Meade (1961, pp. 28-31), that includes 129 detailed recommendations, first

industrial policies were introduced in order to establish other agricultural goods and

manufacturing on the island. Given the lack of capital and of a skilled labor force, Meade

(1961) advised Mauritius to use import substitution to establish the production of mainly

labor intensive goods as an initial developmental step. The infant industries should be

protected by selective quotas and enjoy tax holidays and subsidies to labor costs.

2 International Human Development Indicators, accessed January 2013, <http://hdr.undp.org/en/statistics/> 3 Latest available data of Gini-Coefficient

5

Figure 2: The Economic Trajectory of Mauritius

Source: Makoond (2006) and authors

In 1963, a Development Certificate (DC) Scheme was adopted that granted selected

companies monopoly-like situations either via quantitative import restrictions or high tariffs.

Furthermore, these importers benefited from tax holidays and duty free import of raw

materials and capital goods. Companies founded under that scheme engaged in various fields

like food processing, production of fertilizers, footwear or cosmetics (Wellisz and Saw, 1993,

pp.232-233). With 100 DCs granted and fewer than 5000 workers employed in the 1960s, the

DC program had a limited impact on growth also due to a high wage level (Chernoff and

Warner, 2002 and Mistry and Treebhoohun, 2009). However, import substitution seemed to

be a more promising way than a direct export orientation due to the lack of process and

marketing knowledge in non-sugar manufacturing. As recommended by James Meade, the

Mauritius Agricultural Bank was renamed and established in 1964 as the Development Bank

of Mauritius in order to provide long-term financing for non-sugar industries.

Around 1968, the country experienced social tensions during the process of independence

(Frankel, 2010, p.8) and the unemployment rate reached 20 per cent. Furthermore, the

important sugar sector was dominated by only 19 large plantations owned by a Franco-

Mauritian minority causing economic power concentration contrary to the political

dominance of the Hindu-Mauritian majority (Vandemoortele and Bird, 2011). Indeed, the

starting conditions for Mauritius’ independence indicated a rather poor outlook. Nevertheless,

6

elements for upcoming industrial policies like tax holidays, no tariffs on raw material and

intermediate products and the mindset for diversification towards new sectors and education

was established within the 1960s. Furthermore, the idea of boards or corporations to promote

specific industries and attract investors was also initiated in the Meade Report in 1961. These

boards like the Board of Investment (BOI) and others are still an important part of Mauritius’

current economic and political system.

The 1970s: The first boom

Mauritius experienced exceptionally high real GDP growth rates until the end of the 1970s

peaking in 1976 with a 16.1 per cent increase in real GDP. The main driver for this growth

was the booming world market price for sugar, Mauritius’ major exporting good. It is

important to note that the Mauritian sugar industry did not act in a free market environment

but instead used trade policies and arrangements for preferential access to its export markets.

Since 1951, Mauritius participated in the Commonwealth Sugar Agreement that established

guaranteed sugar prices and allocated quotas to Commonwealth countries. With the entry of

the UK into the European Economic Community (EEC) in 1973, this arrangement was

renegotiated as part of the Lomé Convention. Despite high world market prices for sugar,

Mauritius ensured its preferential access to the European market with the highest quota of all

former European colonies (Bräutigam, 2005, p.68). The so called Sugar Protocol with the

EEC turned out to be a major source of foreign exchange and investment. The sugar exports

within the quota were priced at EEC’s internal prices, which were two or three times higher

than world market prices. The extra-rents for the Mauritian sugar industry, the difference

between European sugar prices and world markets prices, added up to 6.1 per cent of annual

GDP during 1975 and 2000 and thus moderated current account deficits. Remarkably, the

owners of the sugar plantations, also called ‘Grand Blanc’ due to their Franco-Mauritian

heritage, invested their benefits mainly into the upcoming domestic textile industry and

tourism sector and supported the diversification of the economy (Sacerdoti et al., 2005,

pp.21-22). Additionally, the policies and negotiations around the sugar trade established a

long-term cooperation between the government and private sector and gave the example that

rules of global trade can be used or even influenced for the economic advantage of Mauritius

(Bräutigam, 2005, p.69).

With the concept of Export Processing Zones (EPZs), the government adopted in 1970 a new

outward oriented strategy parallel to the inward looking Development Certificates scheme.

7

The idea to segregate export and import sector and to provide incentive for local and foreign

investors was initiated by Prof. Sir Edouard Lim Fat, a Mauritian with roots in China and

Taiwan. He established one of the first EPZ factories and launched the first foreign

investments from Hong Kong and Taiwan, mainly in textile manufacturing. Thus, the lack of

technical and management skills in Mauritius could be overcome by the cooperation with

experienced Asian textile entrepreneurs. Bräutigam (2005, pp. 69-71) emphasizes the

importance of the family and business networks between Mauritians with Asian heritage and

potential Asian investors. In the spirit of Meade, the companies in EPZs enjoyed preferences

like duty free access to imported inputs, tax holidays, free repatriation of capital and profits,

preferential interest rates and lower wage levels compared to the rest of the economy

(Subramanian and Roy, 2001). The success of the EPZ concept was certainly a factor for the

boom in the 1970s. Local sugar producers invested in joint ventures with foreign investors

and created employment especially for the abundant low-skilled labor force. In 1977, 88

enterprises where operating in EPZs with more than 18,100 employees and 20 per cent of

total exports (Nath and Madhoo, 2003 and CSO data). Overall, the unemployment rate

declined to a low of 5.7 per cent in 1977, compared to more than 20 per cent in 1968.

Between 1975 and 1977, employment grew by 30,000 persons, equal to an increase of 18 per

cent. One third of new employment was created in EPZs (CSO and MEF data).

Although Subramanian and Roy (2001, p.9) highlight the early established, OECD-type

social protection in Mauritius, the initial government actions in the 1970s are heavily

criticized. The “Keynesian-type demand management policies” (Sobhee, 2009, p.30)

including subsidies, social services and infrastructure projects generated rising public

spending and large budget deficits. Furthermore, Ancharaz (2003) associates the upcoming

problems at the end of the decade as Dutch Disease-type symptoms as GDP growth and

government spending was fueled by sugar exports. Simultaneously, inflation rates increased

and the currency appreciated. In combination with higher demand for imports and the oil

price hike in 1978/79, the current account deficits and the economic outlook worsened

significantly.

The first economic boom phase with GDP growth rates at record levels in the mid-1970s was

driven mainly by sugar prices and government spending. Hence, the upturn was seen as

unsustainable, also due to non-concessionary foreign borrowings. When economic conditions

eroded from 1978 onwards, the country was supported with structural adjustment programs

and standby arrangements of the International Monetary Fund (IMF) and the World Bank.

8

Nevertheless, Mauritius laid the foundation for future growth already in the 1970s. Especially

trade arrangements that guaranteed preferential access to export markets (the Sugar Protocol

in 1975 and the Multi-Fiber Arrangement (MFA) in 1974) and the EPZ system unfolded its

benefits in the upcoming decades.

The 1980s: Contraction followed by export-led boom

Starting in 1978, the economic situation in Mauritius deteriorated massively and reached rock

bottom in the years 1980 to 1982 with inflation rates up to 42 per cent, a decline in real GDP

by more than 10 per cent, a current account deficit of 13.8 per cent of GDP and

unemployment rates up to 23 per cent (WEO, WDI and CSO data). Moreover, the

government expanded external debt in order to finance infrastructural projects before 1980,

causing a balance of payment crisis. Consequently, IMF and World Bank had to stabilize the

risky economic situation. After two incomplete macro policy agreements in 1978 and 1979,

the IMF implemented successfully four stand-by arrangements between 1980 and 1985.

Additionally, the World Bank granted two structural adjustment loans to Mauritius in June

1981 and June 1983 (Gulhati and Nallari, 1990). As part of the agreements with the IMF, the

Mauritian Rupee was devalued in 1979 by 23 per cent and in 1981 by 20 per cent against

IMF’s Special Drawing Rights (SDR). Further measures like reduced tax rates, liberalized

interest rates, moderate wage policies and trade reforms were set in place to promote the

export-oriented industries and the tourism sector and thus lift Mauritius back on a growth

track (Gulhati and Nallari, 1990 and Mistry and Treebhoohun, 2009).

Indeed, from 1984 onwards the real GDP growth rates averaged more than 6.9 per cent for

the rest of the decade. IMF and World Bank claim this success and argue that policies

following the “Washington Consensus” enabled the export-driven growth (World Bank, 1989

and Bräutigam, 2005). Certainly, policies to ensure a competitive exchange rate and to

control wages stabilized the macro-economic framework significantly and enhanced the

conditions for the drivers of the upcoming growth, EPZs and tourism. However, the basic

structures in both sectors were established in the 1970s. For instance, firms in EPZs already

enjoyed tax holidays and duty-free imports. During the crisis, the real output in EPZ

companies grew on average by 11.7 per cent per year despite some drawbacks in 1982 (CSO,

National Accounts). The breakdown of annual real GDP growth rates by sectors also shows

that the 10.1 per cent decline of real GDP in 1980 was caused by the drop in sugar production

as a cyclone had hit the island in that year. As sugar still accounted for 64.9 per cent of all

9

exports in 1980, the decline in sugar sales caused a reduction of GDP of 8.58 per cent while

the EPZ sector added 0.44 per cent to real GDP. Additionally, the stabilized political situation

after two elections in 1982 and 1983 might have been a trigger for more foreign direct

investment and consecutive growth from 1984 onwards. Therefore, Bräutigam (2005, p.65)

states that policies for more liberalization itself had a limited impact on Mauritius’ industrial

transformation.

Besides the textile industry in the EPZs, the tourism sector performed well in the 1980s. The

number of tourist arrivals and the number of hotels doubled in that decade due to tourists

mainly from the former colonial powers France and UK that enjoyed Mauritius as a bi-lingual

holiday destination. The sector did not only provide more employment but served as a major

source of foreign exchange as gross tourism earnings increased from 42 million US Dollars to

244 million US Dollars between 1980 and 1990 (Sacerdoti et al., 2009). With an average

output growth rate of 13.0 per cent per annum, ‘Restaurants and Hotels’ was the second best

performing subsector from 1984 to 1989, only topped by the EPZs with an annual growth of

23.0 per cent on average (CSO data, National Accounts).

Compared to other economies in SSA, Mauritius could continue its development path after

the crisis in the early 1980s. Although the structural adjustment programs by the IMF and the

World Bank enabled Mauritius to regain stability and competitiveness, a major reason for the

successful economic expansion was the structural changes and the trade agreements of the

1970s that proved to be resilient to the crisis.

The 1990s: Continued diversification and further growth

The achievements in the booming sectors of the 1980s proved to be fruitful throughout the

1990s. Due to the booming economic situation and decreasing growth rates in total labor

force, the unemployment rate declined to a low of 2.7 per cent in 1992. Especially, EPZ firms

created jobs and employed up to 20 per cent of total labor force in the late 1980s and early

1990s (CSO data). Additionally, the tourist sector continued its extraordinary growth. The

number of tourist arrivals doubled from 291,550 to 578,085 between 1990 and 1999 and

tourism receipts increased in US Dollar terms by 122 per cent as the sector successfully

concentrated on high-spending Europeans (Sacerdoti et al., 2009 and CSO data, Tourism).

In the early 1990s, an offshore banking sector was established that increased massively in the

upcoming two decades. At the same time the Stock Exchange of Mauritius was set up and the

10

financial industry with a distribution of 5.0 per cent to GDP in 1990 developed to a

significant pillar for the Mauritian economy. In 2000, the share of financial intermediation4

reached almost 10 per cent of total GDP (see Section IV for more details).

In 1994, Mauritius followed the example of Singapore and opened up the Mauritian

‘Freeport’, two duty-free areas at the seaport and the airport. The initiator of the EPZ system

Prof. Sir Edouard Lim Fat was also chairman of the Mauritian Freeport Authority at that time

and promoted again Asian investments in the Freeport areas (Bräutigam, 2005). The aim was

to establish Mauritius as a logistic, distribution and marketing hub for trade flows between

Africa and Asia. The Freeport facilitated processing and assembly activities and the export of

textiles and clothing, which accounted for two thirds of exported goods in the 1990s (CSO

data).

At the end of the 1990s, the development path of Mauritius – the transformation from a

monocrop economy to an economy with substantial manufacturing and service sectors - made

Mauritius the economy with the highest capacity to achieve sustained economic growth of all

SSA countries according to the Growth Competitiveness Ranking of the World Economic

Forum in 1999.5 Mauritius was ranked number 29 ahead of countries like Thailand (rank 30)

or China (rank 32) (World Economic Forum, 2000).

The 2000s: The End of Trade Preferences and New Sector Development

Although the real GDP increased by 10.2 per cent in 2000 and the current account surplus

averaged 4.2 per cent of GDP from 2001 to 2003 (WEO data), the economic conditions

changed quickly within the first five years of the new millennium. In 2005, two treaties that

guaranteed preferential access to the European and the U.S. markets, the Sugar Protocol and

the MFA phased out. The sugar and the textile and clothing sector had to adjust to the

upcoming more competitive situation. Although the African Growth and Opportunity Act

(AGOA) from 2000, a trade agreement between the USA and Sub-Saharan African countries,

provided Mauritius quota-free access for its apparel exports to the US market, Mauritius lost

4 The term financial intermediation includes Banks, Insurance and other financial businesses 5 For the Growth Competitiveness Index the structures, institutions, and policies in place to achieve economic growth over the medium term (5 years) are analyzed (World Economic Forum, 2001, p.28). Due to changes in the methodology for the 2000 ranking, Mauritius was rank at position 36, still ahead of China (rank 41).

11

market share to other SSA countries like Lesotho or Swaziland in the early 2000s.6 Many

Mauritian textile companies had already invested in SSA countries in the 1990s, for example

in Madagascar (Jamoon, 2006, pp.203-205) to diversify and benefit from regional and

international trade agreements. Consequently, the domestic textile production in Mauritius

declined significantly and mainly women lost their jobs between 2001 and 2005 (see Figure

3). Overall, the distribution to GDP from the EPZ sector decreased from 11.9 per cent in

1999 to 6.8 per cent in 2005 and the sector contributed negatively to the real GDP growth rate

from 2002 to 2005 by -0.71 percentage points annually on average.

Figure 3: Employment and share in GDP in EPZ sector

Source: CSO data

In addition to this, the sugar sector suffered from the upcoming removal of preferences, as

production costs had to be lowered compared to competing sugar exporters like Brazil. In a

voluntary retirement scheme, the number of employees was reduced by 7,900 and salary

costs declined by 30 per cent (Sacerdoti et al., 2005, p.25). With the Sugar Protocol still

valid, the sugar industry contributed between 3.8 and 4.9 per cent to GDP between 2000 and

2005 (CSO data, National Accounts).

With the changing trade conditions, Mauritius’ economic health worsened significantly. In

2005, the unemployment rates peaked at 9.6 per cent for both sexes and 16.2 per cent for the

female labor force. The current account switched from a surplus of 5.9 per cent of GDP in

2001 to -5.0 per cent in 2005 and the budget deficit widened to 5.5 per cent on average

6 Least-developed counties in SSA were excluded from the rule-of-origin and were allowed to use third-country (mainly Asian) inputs for the apparel production. Mauritius, as mid-income country had to use usually higher priced inputs with origin from other SSA counties (Sacerdoti et al., 2009).

12

between 2000 and 2005. However, the overall GDP growth performance was still positive.

The low in real GDP growth rates was reported in 2005 with 1.6 per cent as the textiles and

sugar sector contributed negatively to GDP growth7. Overall, Mauritius still recorded average

real GDP growth rates of 3.9 per cent per year between 2001 and 2005. Especially, the two

other pillars of the economy, tourism and financial intermediation could more than

compensate the downturn in other pillars. But also new sectors like the Information and

Communication Technology (ICT) and the seafood hub showed strong performance during

those years. Hence, the successful diversification made the Mauritian economy resilient

against external economic shocks and guaranteed sustainable growth (Sobhee, 2009).

2. Explaining the economic development

A number of publications evaluate possible explanations for the successful development

among them: prominent papers by Arvind Subramanian (2001 with Devesh Roy and 2009)

and Jeffrey Frankel (2010). One reason for extraordinary growth was certainly the sectoral

transformation of the economy as illustrated in the changing distribution of GDP in Table 2.

Table 2: Percentage distribution to GDP by industry group

1976 1980 1985 1990 1995 2000 2005 Agriculture, forestry and fishing 22.5 12.4 15.3 12.9 10.4 6.5 5.7 Sugarcane 17.8 8.1 11.1 8.0 5.7 3.3 3.0 Manufacturing 15.2 15.2 20.6 24.4 23.0 22.5 19.2 Sugar 5.5 2.4 3.2 3.4 1.6 0.8 0.8 Food - - - - - 3.9 4.9 Textiles and Clothing 2.6 4.3 9.5 12.0 11.5 11.5 6.8 Construction 8.0 7.6 5.6 6.7 6.4 5.3 5.4 Wholesale and Retail 11.3 14.2 13.2 13.0 12.8 11.5 11.9 Hotels and restaurants 1.8 2.3 2.4 3.9 5.1 6.0 7.1 Transport, storage and communications 8.5 11.3 10.9 10.4 11.4 12.7 11.9 Financial intermediation 5.7 5.0 4.7 4.9 6.5 8.8 9.2 Insurance 4.2 3.3 2.9 1.5 2.1 2.3 2.8 Banks 1.5 1.7 1.8 3.5 4.4 5.7 5.1 Other - - - - - 0.8 1.2 Real estate, renting and business activities * 10.2 12.7 11.1 8.9 8.5 8.4 9.8 Other activities 18.6 21.6 18.6 18.8 21.0 24.3 26.9

* Includes real estate activities as well as other business activities like consultancy or services in the offshore

sector not related to the real estate sector.

Source: CSO, National accounts

7 The GDP growth rate without sugar would have been 3.0 per cent (CSO data, national accounts).

13

In a first step, a manufacturing sector producing labor-intensive, low-cost goods was

established apart from the sugar-dominated agriculture in the 1970s and 1980s. These

manufactured products, mainly textiles, were competitive on world markets and the share of

manufacturing in GDP increased from 15.2 per cent in 1976 8 to 24.4 per cent in 1990 but

declined thereafter to 19.2 per cent in 2005 (see Table 2). During the same period, the

percentage contribution of agriculture shrunk significantly from almost one quarter in the

1970s to less than 6 per cent in 2005. In contrast to many countries that also followed this

development strategy, Mauritius was able to do a second step and establish service sectors

like tourism and financial intermediation. These sectors increased their contribution to GDP

from the 1980s onwards. Banks, for instance, contributed only 1.8 per cent to GDP in 1985

but 5.1 per cent in 2005.9

Overall, Mauritius was not only able to have a structural transformation but “on top”, the

single sectors that emerged during the last decades were very successful compared to other

developing countries in SSA. As indicated in the description of the historical development

path, several underlying reasons for the transformation and the success of the sectors have to

be identified.

- Sugar wealth

To emphasize the influence of the sugar sector10 the CSO calculates the real GDP growth

rates including and excluding this sector from 1990 onwards. When this approach is extended

to the period between 1976 and 1989, the historical pattern shows that the influence of sugar

has only disappeared in the 2000s. Especially, in the last years of the 1970s and the 1980s,

the real GDP growth rates without sugar differ significantly from the overall growth rates

(see Table 3)Table 3: The influence of sugar on real growth rate of GDP. 11

8 The Mauritian Central Statistical Office (CSO) provides a breakdown by industries from 1976 onwards 9 Other activities include sectors like Health and Education that increased their contribution to GDP. However, CSO Mauritius uses changing accounting standards in its historical data on National Accounts. A clear breakdown is therefore problematic. 10 Includes sugar in agriculture and in manufacturing (industrial process) 11 For the calculation of GDP growth rates excluding sugar, the sugar production and sugar manufacturing is excluded from the GDP at constant prices and the percentage changes of the remaining sectors are weighted with the distribution without the sugar sector.

14

Table 3: The influence of sugar on real growth rate of GDP

1970s * 1980s 1990s 2000s ** GDP at basic prices 4.9% 4.2% 5.3% 4.9% excluding sugar 6.1% 5.3% 6.0% 4.9%

* 1977-1979 ** 2000-2005

Source: CSO, National Accounts and own calculation

Although the data indicate that the rest of the economy had higher growth rates and also less

volatility excluding sugar (for example in the year 1980), the textile and the tourism industry

were only established due to the re-investment of extra-rents from the sugar production. The

textile and clothing industry was initialized by Asian investors in the early 1970s but local

investors were included via joint ventures and at the end of the 1980s, half of the equity in

this sector was held by Mauritians (Bräutigam, 2003 and 2005). The tourism sector can even

be described as ‘homegrown’ as most hotels chains and resorts are owned by Mauritian

investors mainly from the sugar sector (Sacerdoti et al., 2005, p.36).

Besides its function as source of investment, the export of sugar also produced income in

foreign currency and employment, dampened current account deficits and generated tax

revenues via export taxes on sugar.

- Trade Preferences

The sugar industry is also one of the sectors that benefited from preferential access to export

markets, mainly to the EU and the US. The estimated benefits from the Sugar Protocol differ:

Subramanian and Roy (2001) calculate rents as high as 5.4 per cent per year between 1977

and 2000, other studies like McDonald (1996) and Milner et al. (2004) estimate transfers to

Mauritius between 1.8 and 5.2 per cent of GDP and 4.0 to 8.0 per cent of total exports due to

the sugar protocol. Similarly, the textile and clothing sector benefited from quota-free access

to the European Union that was already guaranteed with the Cotonou Agreement, in 1972.

When the MFA was signed in 1974 and restricted the exports of low-cost textile producers in

Asia to the EU and US markets, Mauritius could build up its garment and textile companies

based on the preferential access to the European markets. Under the US AGOA, signed in

2000, Mauritius had favorable conditions for its apparel exports to the US Markets.

Subramanian and Roy (2001, p.21) estimate that rents from apparel exports to Mauritius

added up to 2.9 per cent of GDP in 1996 and to 3.5 per cent in 1999.

15

Besides the trade agreements with the EU and the USA, Mauritius participates in regional

integration. The country is a member of the Southern African Development Community

(SADC, signed in 1980) and the Common Market for Eastern and Southern Africa

(COMESA, signed in 2000). Mauritius is also connected to Asian countries via the Indian

Ocean Rim, an association of 20 countries including India and Australia.12 Furthermore,

Mauritius negotiated bi-lateral Double Taxation Avoidance Treaties (DTATs) with a wide

range of countries including India and China and African countries. In combination with the

regional trade agreements, the DTATs stimulated the expansion of Mauritian companies to

countries like Seychelles (tourism, banking), Mozambique (sugar) and Madagascar (textiles).

Additionally, these tax and trading agreements attracted investors from third countries to

invest in Mauritius’ DTAT partner countries. Especially the Mauritian financial industry

benefited from investment flows rooted via Mauritius (see in more detail in chapter V).

- Trade Strategies

According to Frankel (2010, p.28) one lesson from the Mauritian experience is that “…trade

is the key to growth, especially for a small country”. Although UNIDO (2009, p.16) describes

Mauritius as “super-exporter” of garments and Sachs and Warner (2005) classify Mauritius as

open to trade since independence, the definition of Mauritius’ trade regime is not clear-cut.

Especially the aspect of trade liberalization and openness leads to different conclusions in the

literature. In contrast to Frankel (2010), Subramanian and Roy (2001, pp.35-36) rank

Mauritius’ trade performance as average and not as a reason for the exceptional growth

performance.

Historically, Mauritius used an inward-oriented trade strategy in the 1960s, but already in

1970 an outward-looking strategy with EPZs was set up and the contrary strategies were

promoted simultaneously. In total, the Mauritian trade regime included three components: (1)

an export tax on sugar13, (2) incentives for the exports of manufactured goods via the EPZ

scheme and (3) the protection of local production. Referring to the latter two components,

Rodrik (1997 p. 29) names this a “two-track strategy”, others call it heterodox trade strategy

(Frankel, 2010) or heterodox opening (Subramanian and Roy, 2001). The essential point why

this regime worked out despite the contrary elements can be seen in the strict separation of

export and import sector, for instance via segmented labor markets. Hence, the import regime

12 Mauritius is also part of the ACP countries, the Commonwealth and the African Union. 13 Export taxes on sugar was also one of Meade’s recommendations (1961, p. 231) to control the expansion of the sugar production, the tax was gradually reduced in the 1980s and eliminated in 1993 (Ancharaz, 1993)

16

was not biased against exports and the import taxes in the 1980s and 1990s could be balanced

by the implicit export subsidies, proven by Subramanian and Roy (2011, p.22). Especially the

extra-rents from trade preferences contributed to that effect.

The trade regime in the 1970s could also be interpreted as social and political compromise.

On the one hand, the Franco-Mauritian minority, holding the economic power, enjoyed the

benefits of trade preferences and export promotion. On the other hand, the majority of

Mauritians with Indian heritage, holding the political power via the Labour Party, could

sustain the import substitution system as part of their Fabian-socialist inspired policies and

thus contrary interests could be balanced. Although, the International Financial Institutions

(IFIs) pushed for a liberalization of the import trade regime, for instance, by replacing

quantitative restrictions by tariffs in 1984, the protection for the import sector remained high

with an average effective rate of protection of 127 per cent in the 1980s (Subramanian and

Roy, 2001). Another reason for the strong consensus throughout all political parties about

protectionism14 was certainly the importance of import duties for government revenue. Even

after two major reductions of nominal tariffs in 1984 and 1994, that were offset by the

introduction of value added tax, import duties still accounted for 34.6 per cent of budget

revenues in 1998 (Ancharaz, 2003). Hence, the Mauritian governments avoided radical

changes in their trade strategies, although import substitution was certainly costly and lobbied

heavily by its beneficiaries, but created a stable and socially balanced environment.

In order to assess the seemingly converging quotations of Subramanian and Roy (2001) and

Frankel (2010) one might argue that the two publications are individually correct. Both

highlight different aspects of the Mauritian trade regime that need to be combined. Firstly,

Subramanian and Roy (2001) correctly assess that trade performance is not the reason for

exceptional growth performance. In Figure 4, the real GDP growth rates are segmented by the

expenditure approach of GDP from 1977 to 2005. The major part of GDP growth can be

ascribed to final consumption expenditure (74.0 per cent on average), followed by gross

domestic fixed capital formation (GDFCF) with 26.3 per cent on average.15 The effect of net

exports in this approach with -0.8 per cent on average is trivial.16

14 At the period from 1979 to 1984 when IMF and World Bank assisted Mauritius with structural adjustment loans, Mauritius had two elections including a change in prime minister in 1982 and coalitions. 15 Government spending is included in final consumption expenditure (with 12.1 per cent of total GDP on average) and GDFCF (8.3 per cent). 16 The fourth component changes in inventories with an average share of 0.5 per cent is neglected here.

17

Secondly, as Frankel (2010, p. 16) argues, the influence of trade and trade regimes for the

Mauritian development process should not be neglected. The EPZs enabled investments and

the export of manufactured goods, leveraged by trade preferences, was an essential strategy

for Mauritius to receive foreign currency. Additionally, EPZs attracted FDI. Following

Romer (1993), ideas from foreign investors associated with FDI inflows enabled the domestic

textile sector to expand. Also the importance for the labor market (companies in EPZs held

30.8 percent of total employment from 1981 to 1986) and the financing of import protection

had an essential economic and social aspect. Overall, the success of Mauritius in trade was

not based on pure liberalization but on balanced and well managed trade regimes.

Figure 4: Contribution of the Three Components of GDP by Expenditure Approach to the Growth of GDP in % (1977 to 2005)

Source: Authors’ calculation with CSO data, National Accounts

- Institutions

The type and the quality of Mauritius’ institutions might be seen as further reasons for the

successful economic development. Institutions, defined by North (1990, p. 3) as “…the rules

of the game in a society or, more formally, […] the humanly devised constraints that shape

human interaction” are recognized as deeper or key determinant of economic development in

parts of the literature.17 More specifically, Acemoglu and Robinson (2008, p. 25) see

differences in economic institutions, for instance property right or entry barriers, as main

reason for cross-country differences in income per capita. Economic institutions are set again

by political institutions according to the authors’ reasoning. For the case of Mauritius,

17 For instance, Acemoglu, Robinson and Johnson (2001), Rodrik, Subramanian and Trebbi (2004) and Acemoglu and James (2008)

18

Subramanian and Roy (2001, p.32, Table 11) argue in the same manner as they identify

strong participatory institutions as a unique feature compared to other developing countries.

These institutions would explain the success of EPZs and trade regimes, policies that were

adopted also by other countries but failed there. The authors also provide econometric

evidence that institutional quality added to Mauritius’ growth compared to African and other

fast growing economies. Furthermore, Sacerdoti et al. (2005, p.42) and Sobhee (2009, p.35)

emphasize Mauritius’ positive scores and rankings in indicators and indices of institutions,

governance and democracy compared to countries in SSA but also to other fast growing

developing countries.

Indeed, Mauritius owes unique characteristics of political institutions. Besides Botswana,

Mauritius is the only country in SSA that is democratic since independence. It is obvious that

political democracy is not a factor for development per se, nevertheless Rodrik and

Subramanian (2003, p. 33) find evidence that sustained economic development appears to be

positively influenced by democracy. As part of the electoral system, Mauritius has adopted

the so called “best-loser” system which allows the Supreme Court to appoint additional

members of the National Assembly in order to strengthen underrepresented communal

groups. Given the multi-ethnical population and the majority of Mauritians with Indian

heritage, this system should ensure the representation of all ethnic groups in the parliament

(Kasenally, 2011). In the more than four decades since independence, the Republic of

Mauritius had four prime ministers and nine governments with different ruling parties and

coalitions. Despite different political view, basic policies like property rights and the social

security systems were supported by all political parties. Following Acemoglu and Robinson

(2008), these stable political institutions enable a country to make collective choices which

consequently result in positive economic institutions that are crucial for development.

In the history of Mauritius several examples in the development process can be found that are

compatible with that argumentation, also described by Subramanian and Roy (2001) and

Frankel (2010). In both publications, the success of the sugar sector and its characteristics are

emphasized. Given the dependence on sugar in the time of independence, the interaction

between the government and the private sugar industry, mainly represented in the Mauritius

Sugar Authority (MSA) was essential. The government used its international diplomacy to

negotiate preferential export prices first to the UK and the EU but the resulting extra-rents

were taxed only moderately and rooted to the privately owned sugar industry. Thus,

Subramanian and Roy (2001) argue that Mauritius did not make the mistake to kill its cash

19

cow and in return benefited from investments into other sectors of the economy also due to

the stable property rights.18

Further historical evidence for the political and social consensus building in Mauritius can be

seen in the handling of the economic crisis in the early 1980s. The agreements with the IMF

and World Bank were discussed broadly also in the media and the strong political institutions

were able to reduce the influence of the IFIs and stabilized the existing economic institutions

(Guhati and Nallari, 1990, p.58). Furthermore, the tripartite salary negotiations that involve

unions, the private sector and the government contributed to social stability and enabled the

separation of an EPZ labor market. Also, the numerous supportive institutions for specific

sectors like the Mauritian Offshore Business Activities Authority (MOBAA), the Mauritian

Freeport Authority (MFPA) or the National Computer Board (NCB) are examples for the

cooperation between the public and the private sector (Mistry and Treebhoohun, 2009,pp.24-

28).

The Mauritian institutions can be regarded as one of the deeper determinants of the

development process, especially after independence. Nevertheless, good governance and the

rule of law are no reason for economic development per se. The example of Mauritius clearly

shows that there are country-specific reasons why and how political and economic

institutions contributed to Mauritius growth story. Consequently, recommendations for other

economies to learn from the Mauritian experience cannot be drawn easily. Beyond the

positive examples there are also negative side effects. For instance, the existing social and

economic exclusion of the creole minority, also known as ‘le malaise créole’, creates pockets

of poverty despite the participatory democratic system. Also the dependence on governmental

intervention and support to establish new sectors might result into lack of entrepreneurial

spirit on the island.

Besides the described reasons for Mauritius’ economic success after independence, there are

numerous other reasons listed in the literature: the transnational business networks and

strategic investing in Africa (Bräutigam, 2005), fiscal policies (Sobhee, 2009 and Zafar,

2010), human resource development and labor markets (Mistry and Treebhoohun, 2009) or

competitive exchange rates and FDI (Subramanian, 2009 and Frankel 2010). Certainly, all

18 The Hindu-dominated Labour party initially planned to nationalize sugar plantations but moderated in the 1960s under the leadership of Seewoosagur Ramgoolam, who was then elected as first Mauritian prime minister in 1967 (Frankel, 2010, p. 7).

20

determinants interact as illustrated in the importance of Asian business networks for EPZs or

the societal consensus about the trade regime.

21

III. Analysis of current economic situation

In the following section, the economic development since 2005 is evaluated in order to

identify sectors that are current growth drivers and might be potential strategic sectors for

future economic growth of the island state.

1. Recent developments since 2005

The current situation of the Mauritian economy should be analyzed with regard to the end of

trade preferences in 2005. Together with the global financial and economic crisis starting in

2008 and the volatile import prices for commodities, the Mauritian economy faced several

challenges. Despite these external shocks, the island economy proved to be quite resilient. In

the period between 2006 and 2011, the real GDP growth averaged 4.7 per cent per year,

compared to an average annual growth rate of 2.4 per cent globally, 3.8 per cent in East Asian

Pacific (EAP) nations and 4.9 per cent in SSA economies. Yet, a number of problems like a

higher level of unemployment, the rising current account deficits or high budget deficits

remain unsolved.

With the phase-out of the MFA at the end of 2004 and the removal of the EU Sugar Protocol

in 200519, Mauritius experienced two exogenous shocks simultaneously in its crucial export

sectors. As of 2005, sugar (16.4 per cent) and clothing and textile (35.5 per cent) exports still

accounted for more than half of total goods exported (UN Comtrade data)20. After the change

in external trade conditions, the exports of sugar decreased in real terms21 by 24 per cent by

2011 (see Figure 5). In the case of clothing and textiles, the exports declined by 20 per cent

by 2010 but recovered in 2011. Although other exported goods, especially fish products

could over-compensate the downturn in exports of apparel between 2000 and 2005, the

exports of these other goods followed a similar trend thereafter.

19 In 2005, prices of sugar exports into the EU declined by 36 per cent. 20 Retrieved from http://comtrade.un.org/ 21 UN Comtrade Data in current USD are deflated by US-CPI (2005=100)

22

Figure 5: Real exports of goods, index (2005=100)

Source: UN Comtrade data, devaluated by US CPI (2000=100)

In the clothing and textile sector and in the sugar industry, the structural adjustments started

before 2005. The trade agreements phased out over a long period of time22 in order to provide

scope for sectorial adjustments and to re-gain competitiveness. Additionally, both sectors still

enjoyed alternative trade preferences (AGOA, GSP) and supportive measures by the EU and

the Mauritian government beyond 2005. Especially the government’s ‘Mauritius Multi-

Annual Adaptation Strategy’ (MAAS), for the restructuring of the sugar sector into a sugar

cluster with ethanol production and electricity generation by 2015, is heavily subsidized by

the EU.23 The textile industry is supported by the government in order to upgrade its

production and it benefits from the extended AGOA treatment (up to 2015) and the removal

of the ‘rules of origin’ in 2008. Consequently, textiles and apparel exports to the USA picked

up by 60% between 2009 and 2011.24

By using the ‘traditional Mauritian’ way, fishery could partly off-set the diminishing exports

in textiles and clothing. The export of fish and fish products like canned tuna benefits from

preferential access to the EU that allows the processing of fish from third countries in

Mauritius, the industry also uses the favorable business conditions in Mauritius’ Free Port.

Between 2000 and 2012, the real export value of fish and fish products seven folded and

represented 14.8 per cent of all goods exported in 2012.

22 In the case of MFA, the end of the agreement was decided at the Uruguay Round in 1995. 23 The Mauritian government received more than 141 million EUR for the period between 2006 and 2010, equal to 20 per cent of all EU funds, and additional 140 million EUR for the years 2011 to 2013 (EU, 2011). In comparison, Mauritius’ sugar exports in 2011 summed up to around 230 million EUR (UN Comtrade data). 24 AGOA Country Information - Mauritius, accessed January 2013, <http://www.agoa.info/index.php?view=country_info&country=mu#>

23

Although the IMF (2011) observed that the number of goods exported25 as well as the

number of export destinations has increased over time, the bulk of exported goods sugar,

textile and fish still represents a low degree of sophistication. Hence, it seems unlikely that

Mauritius’ negative current account from trading in goods will turn positive soon. In contrast

to that the trading in services is a major source of foreign exchange mainly due to the tourism

sector that accounts for 45.6 per cent of all service export income and 24.2 per cent of total

exports in goods and services in 2011 (UN Comtrade data).

Overall, the distribution of service and goods exports switched due to the reduction in goods

exports mainly in sugar and clothing. From 2007 on, the real value of service exceeded the

value of goods exported mainly driven by earnings from tourism (see Figure 6). While trade

in services traditionally shows surpluses, the balance of trade with goods is usually negative

as Mauritius is a commodity importer (see Figure 7). However, the combination of high

commodity prices and lower exports in goods caused a negative net export of goods of more

than -20 per cent of GDP in 2008, compared to -4.4 per cent in 2002 (WDI data).

Figure 6: Exports of goods and services

(in constant 2005 US$)

Source: UN Comtrade data

Figure 7: Net exports of goods and services

(% of GDP in current USD)

Source: WDI data, authors’ calculation

Consequently, the contribution of net exports to GDP (in constant 1999 prices) in the period

between 2009 and 2011 was negative with -2.7 per cent on average (CSO data). Therefore,

the growth drivers of the Mauritian economy after 2005 can be found in sectors other than the

traditional sectors.

25 For instance exports of jewelry and medical devises

24

The development in exports is also reflected in the distribution of GDP after 2005. Despite

the supportive measures, the contribution to GDP of the sugar industry and the textile and

clothing sector diminished significantly. In 2012, the sugar sector added only 1.4 per cent to

GDP26, compared to 4.9 per cent in 2001. The textile and clothing industry accounted for 4.9

per cent of GDP in 2012, a reduction of 1.9 percentage points compared to 2005 (see Table

4). These developments had a large impact on the labor market. From 2000 to 2010, the

employment in the sugar sector dropped by more than 62 per cent to 10,500 employees. Over

the same time period, more than 32,500 jobs were cut in the textile and clothing industry

affecting mainly unskilled women who represent approximately 60 percent of total

employment in EPZ companies27 (CSO data).

Table 4: Percentage distribution of GDP by industry group 2005 to 2012

2005 2006 2007 2008 2009 2010 2011 2012 Agriculture, forestry and fishing 5.7 5.2 4.5 4.1 3.9 3.7 3.7 3.5

Sugarcane 3.0 2.6 2.0 1.8 1.4 1.2 1.3 1.1 Manufacturing 19.2 19.5 19.2 19.4 18.8 18.0 17.7 17.5

Sugar 0.8 0.7 0.5 0.5 0.4 0.3 0.4 0.3

Food 4.9 5.4 5.7 6.6 6.4 6.3 6.2 6.3

Textiles and Clothing 6.8 6.9 6.8 5.7 5.6 5.1 5.2 4.9 Construction 5.4 5.4 6.2 6.8 6.9 6.9 6.5 6.3 Wholesale and Retail 11.9 12.1 11.9 12.0 11.4 11.8 11.9 12.1 Hotels and restaurants 7.1 7.8 8.7 7.9 6.7 7.0 7.1 6.8 Transport, storage and communications 11.9 11.3 11.0 9.8 9.6 9.5 9.2 9.0 Financial intermediation 9.2 9.3 9.8 9.8 10.4 10.0 10.1 10.2

Insurance 2.8 2.8 2.7 2.7 2.9 2.9 3.0 3.1

Banks 5.1 5.3 5.7 5.8 6.1 5.7 5.7 5.7 Real estate, renting and business activities 9.8 10.2 10.6 11.2 11.8 12.3 13.0 13.4

Owner occupied dwellings 4.6 4.6 4.5 4.4 4.4 4.4 4.5 4.4

Business and other real estate activities 5.2 5.6 6.1 6.8 7.4 7.9 8.5 9.1

Other activities 19.8 19.2 18.1 19.0 20.5 20.8 20.8 21.2 Gross Domestic Product at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: CSO, national Accounts

26 Sum of sugar in the industry groups agriculture and manufacturing 27 Employment data of large establishments in EPZs is used as approximation for the textile and clothing industry.

25

Due to the higher exports of fish and fish products the contribution of manufactured food to

GDP increased to 6.3 per cent in 2012 (see Table 4) and became an important sector for the

economy.

The direct contribution of tourism to GDP is captured by the CSO in a Tourism Satellite

Account and includes also transport services and retail expenditures by tourists. In 2007,

tourism accounted for 13.0 per cent of GDP, hotels and restaurants alone represented 8.7 per

cent (see Table 4). However, the sector was hit by the financial and economic crisis from

2008 onwards due to its bias towards high-spending European tourists. In 2009, the number

of tourist arrivals decreased by 6.3 percent and tourist earnings fell by 13.4 per cent.

Consequently, the contribution of tourism to GDP declined to 10.1 per cent. Nevertheless,

export earnings from tourism in real terms28 increased by 50 per cent between 2005 and 2011

and the sector is regarded as further driver of growth. The government estimates the number

of tourists to increase to 2 million by 2015 compared to 965,000 arrivals in 2011 also boosted

by the new airport. However, the estimations, made in the booming years before 2009, seem

to be too optimistic with regard to the stagnating economic situation in most European

countries.

While the traditional growth drivers of the Mauritian economy, sugar and textiles diminished,

other sectors could more than compensated the down-turn in GDP growth but not in exports.

In the next section these growth drivers are identified in order to analyze their potential for

future economic growth in more detail.

2. Current sector distribution and potential growth sectors

With the change in accounting standards to National Standard Industrial Classification

Revision 2 (NSIC Rev 2) in 2012 more details available on the economic activities of

different sectors.29 For instance, the former ‘real estate, renting and business activities’-

sector included business activities like consultancy or services for the offshore sector. Also

transportation and communication activities were combined in one sector under the former

accounting standard. In Figure 8 the detailed GDP distribution in 2012 is illustrated.

The largest sector of the Mauritian economy with 17 per cent of GDP is manufacturing which

is dominated by food and textile production. In third place is financial intermediation with 10

28 UN Comtrade data deflated by US CPI 29 Data with the NSIC Rev 2 standard are recalculated back to 2009

26

per cent followed by several sectors with a contribution of 5 to 6 per cent which also include

information and communication and real estate activities. Interestingly this GDP distribution

is quite similar to the one in Singapore except for information and communication and

accommodation and food services.30

Figure 8: Bird's Eye View on GDP Distribution 2012

*Professional, scientific and technical activities

Source: CSO Data, National Accounts, December 2012 estimates

In the period from 2009 to 2012, the Mauritian real GDP increased by 3.55 per cent annually.

When sectors are ranked by their contribution to GDP growth, Information and

communication is the leading sector with 0.48 percentage points or 13.4 per cent of average

GDP growth followed by Financial intermediation (0.35 percentage points or 9.9 per cent)

and Whole and retail sale (0.33 percentage or 9.2 per cent). But also the sector Professional,

scientific and technical activities that includes management consulting and legal and

accounting activities added 0.3 percentage points to the 3.55 per cent average annual growth.

This is also associated with the importance of the financial and offshore sector in Mauritius.

In order to identify the growth drivers between 2009 and 2012 the average contribution to the

real GDP growth is related to the average sectoral distribution of GDP during the same 30 In 2012, Singapore has the following distribution by sectors: Manufacturing 19%, Wholesale 16%, Financial services 11% and Information and communication 3% and Accommodation and food 2%. Data: Statistics Singapore, National Accounts, accessed February 2013 at <http://www.singstat.gov.sg/statistics/browse_by_theme/national_accounts.html>

27

period. Sectors that add more to GDP growth than their share of GDP would indicate are

therefore seen as growth drivers.31 In Figure 9 growth drivers are sectors above the black line.

Consequently these sectors also increased their share in GDP over the last years (see also

Table 4).

Figure 9: Share of real GDP versus share of GDP growth (2009 to 2012)

Source: Authors’ calculation, CSO data, National accounts, December Estimates for 2012

While the importance of the traditional growth sectors sugar, textile and tourism deteriorated

over the last years, especially the ICT sector (here information and communication) and the

financial sector (including the PST activities and banks) pushed GDP growth. Thus, these

two sectors will be analyzed in detail in order to evaluate the future growth perspectives of

these industries.

One of the identified growth drivers is also reflected in the distribution of FDI inflows by

sectors. From 2006 on, the total FDI inflows to Mauritius surged (see Figure 10) especially in

the growth sector financial and insurance activities.32 In Figure 11, the distribution of inflows

by sectors illustrates that also the real estate (here: IRS, RES and IHS) and the construction

sector received large inflows between 2006 and 2012. The inflows into the tourism sector

31 Results are similar in the period from 2005 to 2012, however the detailed sectorial breakdown is only available from 2009. 32 The peak in FDI in the year 2000 was caused by a single deal in the telecom sector.

28

(here named as accommodation and food services) diminished after 2009 as the global

economic crisis hit this sector.

Figure 10: Total FDI inflows in current USD

Source: UNCTAD stat

Figure 11: FDI Inflows by sectors, in million MRs

*January to September Source: BoM, Monthly Statistical Bulletin Dec 2012

From 2006 to 2012, the flows to real estate account for more than one quarter of FDI. Both

sectors contributed significantly to GDP growth in the 2000s but since 2009 these sectors are

not identified as growth drivers (see Figure 9) anymore.33 However, the massive inflows from

foreign investors have influenced the economic health of Mauritius.

The reasons for the inflows are the specific investment schemes for foreign investors into the

real estate sector as part of the National Physical Development Plan in 2002. The so called

Integrated Resort Schemes (IRS) and the Real Estate Schemes (RES) enable local land

owners to develop and to sell residential housing including leisure and recreation facilities to

non-citizen investors. Additionally, the Investment in Hotel Schemes (IHS) provides

participation in hotel projects for foreign investors, but also investment in shopping malls and

business parks are promoted. The government expected positive side-effects for the financial

industry and the retail and tourism sectors as buyers of properties worth more than 500,000

USD are entitled to a resident permit (BOI, 2012). Therefore, the target group is mainly high-

net-worth individuals (HNWI) from Europe and South Africa looking for a second home

spending time on Mauritius.

The success of this investment promotion is visible on the island, especially near the coastal

line in the north and the west of the island where large residential and shopping malls have

been constructed. Consequently, the employment in both sectors increased from 2006 on by 33 From 2000 to 2009 the construction and the real estate sector (only Owner occupied dwellings) accounted for 11.6 per cent of annual real GDP growth (CSO data, National Accounts)

29

35 per cent to 38,000 employees in 2010 (CSO data). However, the large inflows and the

characteristics of the investments scheme have also caused negative side effects that bear

some risk for the future development:

(1) Although there are no official data on land or real estate prices, experts estimate that real

estate prices, also for local properties, have risen at double-digit rates in the recent years,

mostly in areas with IRS, RES and IHR properties (see also Grynberg, 2012). Newspaper

often report about speculation with land at or close to the coast that are most attractive for

land developers. As an indicator for the price development the comparison of real and

nominal values of building and construction work as part of the Gross Domestic Fixed

Capital Formation (GDFCF) might be used (CSO data, National Accounts). The underlying

price index shows that prices for residential and commercial buildings rose by 90 per cent

based on 1999 prices (see Figure 12). According to this measurement, the largest price hikes

happened in 2007 and 2008 but prices stabilized in 2009 and 2010 and rose thereafter despite

the global financial crisis. This is also in line with the number of permits issued for

residential and for non-residential building that both peaked in 2007 but slowed down

thereafter.

Figure 12: Building and construction work prices, index (1999=100)

Source: Authors’ calculations from CSO data, National Accounts

However, without official data, the analysis of the real estate markets and the interpretation

with regards to economic stability is difficult. Actual paid rents as part of the CPI calculation

saw only a moderate increase of five per cent between 2002 and 2007 contrary to the

presented price index here (CSO data, CPI). Also the impact of foreign investments on the

30

local real estate market has to be assessed further given the fact that foreign investments are

only limited to specific investment schemes. It might be argued that the investment inflows

only affected a limited high-level real estate market.

(2) The further development of real estate prices has also an impact on the stability of banks.

Within the last decade the distribution of the credit portfolio of Mauritian banks has shifted

towards a concentration of loans on the construction and the tourism sector. In 2001, the

construction sector accounted for 14.2 per cent of all credits from banks, with 8.1 per cent of

total credits in housing. The tourism sector received 6.9 per cent at that time. By the end of

2011, the share of the construction sector increased to 24.2 per cent, including 13.9 per cent

to housing. Property developers account now for 5.9 per cent of all credits, the tourism sector

for 19.0 per cent. In comparison, credits to manufacturing, still the largest sector of the whole

economy, added up to only 8.0 per cent. The ICT sector received only 0.5% of the total credit

volume (BoM data, Monthly Statistical Bulletin Dec 2001 and Dec 2011). Although the

overall number of non-performing loans remained low, the Bank of Mauritius noticed in its

minutes to the monetary policy meeting in September 2012, that non-performing loan in the

construction and the tourism sector have increased. In total the ratio of non-performing loans

in the construction sector reached 7.9 per cent from 5.4 per cent in 2011.34 Also the largest

Mauritian private Bank, the Mauritian Commercial Bank (MCB) reported in its 2012 annual

report that 12 per cent of loans to the construction sector were non-performing (MCB,

2012a). Hence, a sudden drop in construction activities might also destabilize the local

banking sector given the high share of total credits to the construction sector.

(3) Besides the economic concerns about the investment schemes in real estate, there are also

social problems associated with the characteristics of the constructed properties. As IRS and

RES buildings are usually in exclusive gated communities and constructed on the most

attractive land near the coastline, the projects are not considered as an integrated part of the

Mauritian economy but as a capitalist enclave (Greig and Turner., 2011, p. 168, Kasenally,

2011). Furthermore, the projects are also blamed for higher property prices, land shortages

and higher construction costs for all Mauritians on the island (Republic of Mauritius, 2010).

Overall, the limited opening of the real estate sector has until now paid off for Mauritius. The

real estate and the construction sector were one of the growth drivers of the last decade and 34 Bloomberg- Mauritius Central Banks to Monitor Rise in Non-Performing Loans, accessed February, 2013 <http://www.bloomberg.com/news/2012-09-25/mauritius-central-bank-to-monitor-rise-in-non-performing-loans.html>

31

the FDI inflows eased the pressure of rising current account deficits. However, this strategy is

a very risky one as the real estate sector might run into a price bubble fueled by large foreign

investments into a limited market.

IV. The potential middle income trap

A current aspect of the Mauritian growth story is the potential ‘middle-income trap’. The

concept of ‘middle-income traps’ refers to a situation when countries are able to develop

from a low-income to a middle income level but “…seem not to make it into the high-income

group” (Filipe, 2012, p.2). Officially, the World Bank classifies Mauritius as upper-middle

income country. Thus, the questions that have to be answered with respect to Mauritius are:

(1) Is Mauritius really in danger of potential ‘middle-income’ trap? and (2) If yes, how can

this trap be avoided?

Some authors rank Mauritius already in the high-income class. When per capita income is

measured relative to the USA, Mauritius is one of only 13 countries, mainly European and

Asian economies, that upgraded from the middle-income group in 1960 to the high income

group in 2008 and thus escaped the ‘middle-income trap’ (World Bank and Development

Research Center of the State Council of the People’s Republic of China, 2012, p.12). Filipe

(2012) uses the number of years a country stays in one of the specific income classes35 to

define the trap. For instance, countries that remain longer than 14 years in the upper-middle

income group (equal to median of year in that class) are in danger to be trapped. As Mauritius

was only 12 years in the upper-middle income group (between 1991 and 2003), the country

already escaped the middle-income trap by this definition.

Contrary, Eichengreen, Park and Shin (2012 and 2013) analyze patterns in growth slow-

downs that appear when countries reach a certain level of per capita GDP. In their updated

publication in 2013, the authors find two ranges when high growth periods often come to an

end, one at a per capita GDP in 2005 PPP US Dollar of 10,000 to 11,000 and a second at

15,000 to 16,000 US Dollar. The analysis includes only countries with per capita GDP above

10,000 US Dollar before a potential 7-year slowdown period in order to capture only middle

income countries. As Mauritius hits this criteria only in 2010 (10,163.74 USD per capita

35 Filipe (2012) defines income classes based on GDP per capita in 1990 PPP dollars in order to extend the classification for the 1950 to 2010. This method differs from the World Bank classification that uses GNI data but is only available from 1987 onwards.

32

GDP), the island economy is not considered (data source is PWT 7.1).36 However, for the

case of Mauritius the results of Eichengreen, Park and Shin (2013) imply that Mauritius has

now reached an income level associated with a high risk of a slowdown in economic growth,

also given that the island had annual growth rates close to the authors’ definition of high-

growth before 2010 (on average 3.5 per cent p.a.). Hence, the question if Mauritius has

already jumped over the barrier to be a high income country is not yet decided and depends

on the methodology and the data used. Yet, the level of level of income per capita still

indicates a potential risk of a middle-income trap.

Eichengreen, Park and Shin (2012) also provide a growth accounting approach to determine

the reasons for the observed slowdowns. In a growth accounting approach, the GDP growth

rates are broken down into growth rates of capital (K), labor input (L) and human capital (H).

The total factor productivity is then computed as residual and includes the influence of other

factors like institutions, technological progress or infrastructure (IMF, 2011, p. 29).

Eichengreen, Park and Shin report that “… 85 per cent of the slowdown in the rate of growth

of output is explained by the slow-down in the rate of TFP [total factor productivity] growth”

(2012, p. 54). Consequently, the crucial factors to avoid slowing GDP growth rates are

institutions, technological progress and infrastructure and simultaneous improvements in

human capital.

The authors’ findings support the potential growth limitations in a globally identified

development process described by Canuto (2011), which can also be applied for the case of

Mauritius. The underlying process typically starts with the employment of a large pool of

unskilled labor in simple manufacturing and service activities that requires capital and

technology easily available from richer countries. For Mauritius, the historical decomposition

of the real GDP growth rate by the IMF (2011) shows that the main driver of growth in the

1970s and 1980s was the increase in capital and labor inputs, mainly associated with the

establishment of the textile and tourism industry (see Table 5). In a second stage, the adopted

technologies are typically adjusted to local circumstances leading to growth due to increased

TFP. Indeed, the contribution of TFP to the Mauritian GDP growth rate picked up in the

36 In the primary publication, Eichengreen, Park and Shin (2012) used PWT 6.3 and a growth slow-down was registered in 1992. However, the per capita GDP in PPP 2005 USD was revised drastically in the PWT 7.0 and is now closer to data from other sources like WDI. Still, the PWT data are questionable in the case of Mauritius.

33

1990s and the 2000s.37 This development was also described in detail by Subramanian and

Roy (2003, p.24) for the example of the EPZ sector. The sector specific TFP accounted

negatively to growth in the 1980s (-0.8 per cent) but surged up to 5.4 per cent in the 1990s

when the available pool of labor was exhausted (lowest unemployment rate in 1992) and

higher wage costs forced the textile companies to improve their efficiency (Sacerdoti et al.,

2005, p.30). Simultaneously, the diversification of the Mauritian economy into service

sectors like the financial sector was pushed forward, similar to a third step in the common

global development process. This step requires higher technological and institutional

standards as well as improvements in human capital. Thus, the share of GDP growth related

to human capital and TFP increased in the 1990s and 2000s.

Table 5: Decomposition of real GDP growth (in percentage points)

1960s 1970s 1980s 1990s 2000s GDP growth rates: 2.4 6.0 4.5 5.2 4.4

Contribution of: Capital 0.7 2.3 1.7 2.5 1.8 Labor 1.7 2.6 2.1 1.1 0.8 Human Capital 0.9 0.9 0.7 0.7 0.9 TFP 0.7 0.3 -0.1 0.9 0.9

Elasticity of 0.35, H is extracted from the data source Source: IMF (2011)

The policies to maintain high GDP growth rates in order avoid the potential middle-income

trap focus on contributors to growth beyond capital and labor inputs. For instance Agénor and

Canuto (2012) identified three major policy implications: the access to advanced

infrastructure, enhanced protection of property rights and open labor markets. As shown

before, Mauritius has proven to protect property rights with stable political and economic

institutions. Additionally, Mauritius has done an important step to avoid growth slowdowns

by investing in ICT infrastructure which is important for the prospects of the ICT sector itself

and the financial industry. However, this has to go along with improvements in the

educational system in order to have higher skilled people that can be employed in these new

service sectors. Eichengreen et al. (2013) provide evidence that a higher number of graduates

of secondary schools and universities reduces the likelihood of growth slowdowns as this

37 The use of growth accounting approach is controversial as it is usually based on a Cobb-Douglas production function and highly dependent on the author’s estimations for elasticities, share of labor, inclusion of human capital and on the start and the length of the data period. Hence, other publication like Rojid and Seetanah (2009) find that TFP has reached a plateau and contribution decreased between 1980 and 2007 (see also Zafar, 2011).

34

enables the production of more technologically sophisticated goods and services. Contrary to

this, Mauritius still has a high drop-out rate of one third after the primary school and a tertiary

enrollment rate of only 40 per cent. Therefore the IMF (2011, p.32) recommends further

investment in education and an education reform, and improvements in public utilities and

transport infrastructure and a better access of women to the labor markets38 in order to

enhance contribution of TFP and human capital to growth.

Besides the constraints in human resources, the major threat for further development of the

Mauritian economy might be the risky situation in international trade, a problem that is rather

independent from the discussion about middle-income traps. The Mauritian economy

diversified into various new sectors but the crucial export sectors sugar and textiles could not

move up significantly in the value chain. With the end of trade preference in 2005, the

external trade conditions changed drastically and lead to a significant current account deficit

of more than 10 per cent of GDP, a level only experienced in the economic crisis of the late

1970s and early 1980s (see Figure 13). Although service exports increased and account for

the majority of all exports from 2007 onwards, the downturn in goods exports could not be

compensated. Moreover, the contribution of the identified growth drivers financial mediation

and ICT to total exports is currently marginal. This situation is also contradictory to the

experience of Asian economies like Korea or Singapore that escaped the middle- income trap

due to export-led growth.

Figure 13: GDP Growth and Current account balance 1976 to 2011

Source: WDI data

38 Similar to the policy implications of Agénor et al. (2012)

35

Based on the discussion about middle-income traps, the strategies and policy

recommendations to continue the high growth performance of the Mauritian economy seem

to be clear. Besides higher contribution of capital inputs to GDP growth via FDI and

domestic savings, the scope for upgrades are clearly given in the Mauritian educational

system and the infrastructure leading to higher TPF and improved human capital. Especially

the further development of the prospective growth sectors financial intermediation and ICT

depends on such improvements. Although the Mauritian GDP growth was not driven by net

exports, as shown in chapter II, the magnitude of the current account deficit might cause

lower growth path due to balance of payment constraints in the medium run. Hence, the

prospects of these two potential growth sectors, the financial industry and ICT will be

analyzed in chapter V, also with regard to their potential to avoid such a balance of payment

constraint growth scenario.

36

V. Evaluation of the potential growth sectors

1. The financial sector

For the Mauritian economy, the financial sector became a major contributor to economic

growth especially from the 1990s onwards and is seen as one of the four main economic

pillars of Mauritius besides sugar, manufacturing and tourism. The percentage contribution to

GDP of financial intermediation including banking, insurance and other services increased

significantly from 4.5 per cent in 1990 to an estimated level of 10.2 per cent in 2012 (see

Figure 14). On average, the sectoral growth rate was 7.6 per cent per year during that period.

Figure 14: Percentage contribution to GDP by financial intermediation

Source: CSO, national accounts

The financial sector is characterized by the dominance of domestically and foreign controlled

banks, generating 5.7 per cent of GDP in 2012 and by large financial flows routed via

Mauritius. Since the early 1990s, Mauritian tax-beneficial schemes are used especially for

investments into India. In this context a discussion about Mauritius as potential tax haven is

still ongoing despite the fact that Mauritius has always been an official white listed

jurisdiction. Although more than 37 per cent of all FDI inflows into India between 2000 and

2012 were routed via Mauritius39, the benefits from these flows for the Mauritian economy

are still limited. The financial industry is still a net importer of services, mainly in the

39 Fact Sheet on Foreign Direct Investment - Indian Ministry of Commerce and Industry department of industrial policy and promotion, accessed November 2012, <http://dipp.nic.in/English/Publications/FDI_Statistics/2012/india_FDI_August2012.pdf>

37

insurance sector. Nevertheless, the financial sector is recognized as “the Linchpin” of the

economy (Budget Speech - Minister of Finance, 2011) and as sector with long-term growth

prospects if it is possible to generate more substance and value addition.

A detailed overview on the financial sector is followed by a SWOT analysis and potential

growth fields in the sector.

i. The history of the financial sector

The roots of the banking business go back to the first half of the 18th century40. However, at

the time of independence in 1968 the financial sector was still limited with five, mainly

foreign controlled commercial banks, some parastatal financial institutions like the

Development Bank of Mauritius, a housing finance cooperation, a cooperative bank, various

insurance companies and other small participants operating. The main tasks of banks

included financing for the sugar industry and for import trade, as already described in

Meade’s report (1961, p.189). From 1964 on, only the Development Bank provided long-

term finance. However, with the upcoming change from a monocrop economy to an

industrializing economy, the need for productive capital and alternative ways of financing

increased significantly in the first years after independence. These changes in the domestic

economy were accompanied by shifts in the legislative framework. The Bank of Mauritius

(BoM) was established as central bank in 1967 and was endowed with the power to supervise

and license banks in 1971. Consequently, the number of participants on the domestic

financial markets increased during the 1970s. For instance, the number of commercial banks

doubled from five to ten banks in the five-year period from 1970 to 1975 including the

establishment of the now second largest domestic bank, the State Bank of Mauritius (SBM)

in 197341 and increased further to twelve licensed commercial banks in 1980. Sacerdoti et al.

(2005, p.72) report that savings accounts doubled between 1969 and 1972 and time and

savings deposits even increased by twelve times over the period from 1967 to 1974.

Mauritius also experienced a boom in non-bank financial institutions and insurance

companies in the second half of the 1970s and the early 1980s (Nowbutsing, 2010, p.4). Still,

the development of the financial sector up to the mid-1980s was focused on the domestic

market. But already in the early 1980s first plans to establish Mauritius as an offshore

financial center (OFC) were discussed (Mistry and Treebhoohun, 2009, p.49). 40 Bank of Mauritius was founded in 1813 – but failed 1825, Mauritius Commercial Bank was established 1838 41 SMB Corporate Profile, accessed November 2012, <http://www.sbmgroup.mu/au.php?suf1=au&lang=en>

38

Mauritius as offshore finance center

With the establishment of an offshore financial center, Mauritius followed an international

trend. Mainly small island economies, from the 1960s onwards, used OFCs to diversify their

economic structure. Besides this diversification effect, the build-up of OFCs promised direct

effects like license fees, job creation and foreign exchange earnings as well as indirect effects

like skills and technical spillovers (Doyle and Johnson, 1999; Suss et al. 2002). The IMF

(2000) defines offshore finance as “…the provision of financial services by banks and other

agents to non-residents” and relates the term OFC with the some or all of the following

attributes:

Relatively large numbers of financial institutions engaged primarily in business with

non-residents

External assets and liabilities out of proportion to domestic financial intermediation

designed to finance domestic economies

Services like low or zero taxation, moderate or light financial regulation, banking

secrecy and anonymity.

The characteristics of OFCs differ significantly across the world. Economies like Hong Kong

or Singapore were able to create high value generating offshore banking that attracts major

international financial players, while mainly small island economies in Europe, the Caribbean

and the South Pacific engaged in low value adding business based mainly on tax incentives.

Often this second group of OFCs was associated with tax evasion and fiscal crime like money

laundry, including the Seychelles in the 1980s (Mistry and Treebhoohun, 2009, p.49). Hence,

it was the task of the government to set up a suitable legislative framework and tax regime for

a financial offshore business that would be suitable for international financial companies and

simultaneously avoid reputational risk for Mauritius.

The first step was a renewed Banking Act in 1988 that introduced two different licenses

granted by the Bank of Mauritius with Category 1 -banks as domestic banks and Category 2 -

banks that conduct their business in other currencies than the Mauritian currency. Hence,

there was a clear separation between the offshore and the onshore banking sector in the

beginning. The first bank to be granted an offshore banking license including a specific tax

regime was Barclays in 1989 (Mauritius Bankers Association (MBA) 2012; Mistry and

Treebhoohun, 2009, p.49) followed by a number of international banks in the 1990s. In the

year 2000, 10 banks used Mauritius as a base for their offshore activities. Already in the

39

1990s, the success of the offshore banking sector was remarkable, which is indicated by the

increase of total assets (absolute and relative to GDP) from below 500 million USD (or 12.6

per cent of GDP) in 1995 to 4,025 million USD (or 93.7 per cent of GDP) in 2000 (see Figure

15).

Figure 15: Total Assets of Banks in Mauritius in billion MURs and as share of GDP in % (right axis) 1995 to 2000

Source: Computed with data from BoM Annual Reports (1998/99 to 2011) and IMF’s Financial Soundness Indicators on Mauritius (2009 to 2011) and World Bank Indicators

In addition to the offshore banking sector, other offshore activities like insurances, fund

management, investment holdings and operational headquarters were approved and regulated

by the Mauritian Offshore Business Act in 1992. The newly founded Mauritius Offshore

Business Activities Authority (MOBAA) was responsible for licensing, monitoring and

supervising and also for promoting the offshore business sector. The authority issued two

types of licenses: one for ‘Offshore Companies’ defined as tax resident with access to

Mauritius’ Double Tax Avoidance Treaties (DTAT) and a second one for ‘International

Companies’ that were seen as non-residents and therefore tax-exempted to the Republic of

Mauritius.

As OFCs are mainly used by trans-national companies and world’s wealthiest individuals,

also called high-net-worth individuals (HNWI) (Hampton and Christensen, 2002), the

competition from established OFCs like Luxembourg, Cayman Islands or Singapore that

served the European, American and Asian markets for these customers was high in the early

1990s (Mistry and Treebhoohun, 2009, p.50). But Mauritius was given a unique comparative

advantage when India opened up its market for international capital inflows in 1992. FDI

inflows to India and especially portfolio inflows multiplied within the following years and

40

also foreign corporate debt inflows, a major business for offshore banks, increased

significantly (see Athreye and Kapur, 1999). Due to the Double Tax Agreement (DTAT)

between India and Mauritius, negotiated in 1983 and in force since 1985, it was very

attractive for foreign investors to use the Mauritian tax regime for licensed offshore

companies with no tax on capital gains for investments into India. Consequently, the amount

of capital flows routed through Mauritius increased drastically. Furthermore, bilateral DTATs

were signed with countries like Kenya (1992), China (1995) and South Africa (1997). In

total, 24 out of the 37 currently valid DTATs with different specifications were initiated in

the 1980s and 1990s.42 The success in the offshore sector can be illustrated by the number of

companies that were registered at the MOBAA: in the 5-year period from 1995 to 2000

registrations rose from 3,193 to 14,069. Among those, Collective Investment Schemes (CIS)

and Closed-end Funds holding increased from 61 with net asset values of 2.2 billion US

Dollar to 216 and 8.98 billion US Dollar invested over the same period.43 With the success in

the offshore business, the exports of insurance and financial services increased drastically in

the second half of the 1990s. Starting from a negligible level in 1995, these exports jumped to

6.7 per cent of service export in 2001 (WDI data).

Although the offshore sector showed impressive growth rates, the major challenge was the

development of a modern legislation for new types of financial structures and companies and

effective regulation and supervision of the offshore sector. The two main reasons for these

improvements were firstly, the need to attract international investors with up-to-date services

and products. Consequently, the various innovations like protected cell companies (1999) or

the Trust Act (2001) and the Insurance Act (2005) were pushed forward or renewed.

Secondly, at the end of the 1990s international organizations like the OECD or the Financial

Action Task Force (FATF, set up by the G7) called for stricter rules against money

laundering and - even more crucial for Mauritius – for the abrogation of harmful tax

competition. In 1998, the OECD defined the key factors to identify harmful tax regimes as

(1) no or low effective tax rates, (2) “ring fencing” of regimes which is the existence of an

offshore tax system isolated from the domestic economy, (3) lack of transparency and (4)

lack of effective exchange of information (OECD, 1998, p.27). Based on these criteria,

Mauritius was accused to have a harmful tax system but was not black-listed in 2001 due to

42 Board of Investment – DTA, IPPA and Bilateral Treaties, accessed November 2012, < http://www.investmauritius.com/Resources3a.aspx> 43 FSC Annual Reports 2002 and 2003

41

the high level of political commitment to eliminate these practices (OECD, 2000, p.29).44

Already in 1998, the Mauritian government has set the income tax rate for offshore

companies to 15 per cent45, similar to the tax rate for domestic companies in order to

eliminate “ring fencing”. In the Companies Act of 2001 domestic and offshore companies

were regulated under a single legislative act and the offshore sector was re-labeled as ‘Global

Business’. In 2004 then, a single license system for banks was introduced in the Banking Act.

With improvements in anti-money laundering and prevention of related financial crimes in

the years 2000 to 2002, the Mauritian government made an effort to cooperate with the FATF

and other international organizations. Furthermore, the supervision of financial markets was

changed when the Financial Services Commission was created (Financial Service

Development Act 2001) to monitor and supervise the non-bank financial sector. Hence,

Mauritius was able to avoid black-listings as tax haven but due to this discussion the

insurance and financial service exports dropped from close to 7 per cent of service exports in

2001 to only 1.7 per cent on average between 2002 and 2004 (WDI Data, Mistry and

Treebhoohun, 2009, p.60). Also some organizations like the Tax Justice Network (2007) and

the Norwegian Government Commission on Capital Flight from Poor Countries (NOU, 2009)

still classify Mauritius as tax haven.

ii. The recent developments and current structure

In order to illustrate the links and dynamics within the financial sector, a basic cluster

approach is applied in the following section that includes broad and narrow sub-sectors of the

financial industry. According to the Board of Investment (BoM), the Mauritian financial

system is classified by five functional groups, shown in Table 6. As the financial sector

combines domestic and international financial services, most sub-sectors are separated into

domestic companies and offshore companies that are classified by Global Business

Categories (GBC)46. Due to the single banking license for all banks, there are only domestic

companies listed although some banks are foreign controlled.

44 Mauritius reached an agreement with the OECD for more transparency and tax information exchange until 2005 45 The effective tax rate can be reduced to 3 per cent as foreign tax credit for up to 80 per cent of the Mauritian tax rate can be used - LowTax Global Tax & Business Portal, accessed November 2012, <http://www.lowtax.net/lowtax/html/jmuoltr.html> 46 The relevant companies here fall into the Global Business Category 1 (GCB1), more details on the categories later on.

42

Table 6: Financial sector by functional groups (number of companies as of 2010)

Functional Group Main functions # of domestic

companies # of GBC1 companies Other details

Banking Retail and Corporate Banking. Wealth Management, Investment Banking, Global Business Banking, Islamic Banking

19 -

7 local banks, 6 foreign owned subsidiaries, 1 joint venture and 4 branches of foreign banks

Global Business Investment Holdings, Global Funds, etc. - 9,409 Additionally 15,725

GBC2 companies

Insurance General Insurance, Long-term insurance, Reinsurance 1,482 31

Domestic companies include 1,257 Salespersons

Capital Markets

Equity Markets, Commodity Trading Platform, Listing of GBC1s 166 86

# of companies listed as Securities or Capital Market Intermediaries (FSC)

Other Financial Services

Brokerage, Accounting, Tax and Investment advisory, International Law firms, Leasing

64 7

# of companies listed as Financial Services and Specialized Financial Services (FSC)

Source: BOI (2012) and FSC (2011)

The number of companies in the functional groups insurance, capital markets and other

financial services are based on statistical data by the FSC (2011) that supervises business

activities in the non-banking financial services and global business sector. However, the FSC

data for capital markets and other financial services contain only specific companies; other

associated companies like international law firms are not included here.

For an illustration of the interconnections within the sector, Figure 16 contains the sub-

sectors besides banking and global business according to the more detailed breakdown of the

FSC. The data on total assets of the sub-sectors are based on 2010 data47 and are illustrated

by the size of the squared areas around banks, insurances, non-bank deposit taking

institutions (NBDTI), financial services, specialized financial services and capital market

intermediaries. Global business and capital markets are shown as functional areas, as well as

the related services for the whole financial sector. Furthermore, the darker areas are

associated with activities in the global business sector. The interrelations within the sector are

described in detail in the following.

47 Latest data for FSC supervised subsector in FSC Annual Statistical Bulletin 2011.

43

Figure 16 : The Mauritian financial sector

Source: authors’ concept

Banks

The main players on the Mauritius financial market measured by total assets are commercial

banks. In 2011, 20 banks 48 were licensed in Mauritius accounting for total on-balance sheet

assets of 272 per cent of GDP. Although all banks can now undertake domestic as well as

offshore transactions and are registered under a single banking license since 2004, a

separation between the business models of local banks and foreign controlled banks is still

valid. Most banks of the former offshore category engage in investment banking, global

transaction banking and wealth management and have limited activities in the Mauritian

market. Hence, we might still differentiate by banks that are engaged mostly in domestic or

non-domestic (offshore) business by assuming that domestically controlled banks hold the

majority of domestic assets, while foreign controlled banks hold mainly foreign assets. As

data base, reports of the Bank of Mauritius on total assets in the banking sector and assets of

48 6 local banks, 7 foreign owned subsidiaries, 1 joint venture and 6 branches of foreign banks (MBA, 2012)

44

local banks from 2006 onwards are used.49 Before 2006 separate data were reported for both

types of banks. This separation is graphically represented by the darker and lighter areas in

the subsector ‘Banks’ in Figure 16. Both, total assets of domestically and foreign controlled

banks increased significantly in absolute terms from 2000 onwards (see Figure 17).

Figure 17 Total Assets of Banks in Mauritius in billion MURs, 2000 to 2011*

Figure 18: Total Assets of Banks in Mauritius as share of GDP in %

* 2000 to 2005 Data on domestic and offshore banks, after 2005 domestically and foreign controlled

banks

Source: Computed with data from BoM Annual Reports (2001 to 2011) and IMF’s Financial Soundness

Indicators on Mauritius (2009 to 2011) and World Bank Indicators

The change in assets of domestic banks in the period from 2006 to 2011 (+ 139 billion

MURs) is mainly due to the increase in credits to the domestic private sector (+95 billion

MURs). Hence, the hike in total assets of the rest of the banking sector was mainly based on

offshore banking activities. Especially the surge in total assets by 38.5 per cent50 from 2005

to 2006 is caused by a change in foreign assets or more specifically in loans outside Mauritius

and balances with banks abroad. The measurement of total assets as a share of GDP

underlines the importance of assets hold in foreign controlled banks as assets of domestically

controlled banks remained at a level of 100 per cent of GDP (see Figure 18). One reason for

the growth of foreign assets is the increasing need for capital in the main markets targeted by

offshore banks in Mauritius, India and Africa. Indian companies, for instance, can have better

access to foreign exchange loans via international banks licensed in Mauritius as these banks

are funded in foreign exchange. Even more importantly, the Indian companies benefit from

lower funding costs of these banks as there is no interest withholding tax for banks, due to the

DTAT between Mauritius and India. The same is true for other countries where interest

49 BoM Annual Reports for local banks, Monthly Statistical Bulletins (also BoM) for total banking sector, assets of foreign controlled banks as difference of both data sourcs 50 Computed with data of Bank of Mauritius, Monthly Statistical Bulletin January 2007

45

withholding tax is reduced or set to be zero in DTATs (for example with Rwanda, Senegal or

South Africa). The net interest income out of this business is by far the major source of

income for the three largest foreign controlled banks, HSBC Mauritius, Barclays and

Standard Chartered in the years 2008 to 2010 (MBA, 2012). Besides that, the requirement for

GBC1 companies to hold a bank account with a Mauritian bank creates additional banking

activities like foreign exchange, transaction and trade financing services for the banking

sector. Although, local banks offer these services for GBC1 companies as well, the former

offshore banks still dominate these activities. For instance, HSBC claimed in 2007 that more

than half the GBC1 companies hold their accounts with them.

In the 2008, the IMF certified that “Mauritius has a relatively well-developed financial

system…” (IMF, 2008, p.9) including high profitable banks that are comfortably capitalized.

Indeed, the average data on capital adequacy and return on equity are constantly on a high

level. With up to 16.6 per cent in 2010, the capital adequacy ratio exceeded the regulatory

requirement by the Bank of Mauritius of 10 per cent and the 8 per cent requirement in the

upcoming agreement of Basel III (see Figure 19).

Figure 19: Capital Adequacy Ratio Mauritian Banking Sector*

*Data after 2005 include former offshore banks Source: Bank of Mauritius, Banking Supervision Reports The return on equity (ROE) in the banking system was on average as high as 22.2 per cent

between 2006 and 2011. Interestingly, both offshore banks and domestic banks were highly

profitable (both close to 20 per cent) in the years before they were registered under one

license in 2004, although the business models were different. One explanation for the

profitability of domestic banks might be the spread between interest earned in advances and

cost of deposits that was on average at 4.07 per cent between 2006 and 2009 and decreased

recently to the level of 2.7 per cent in 2011. However, the performance figures might be

46

biased due to the high level of concentration in the banking sector. Especially, the local

banking market is dominated by two banks, with MCB and SBM representing 81.9 per cent

of total assets of local banks in 2011.51 The foreign controlled banks are also concentrated

with total assets of HSBC Bank Mauritius Ltd. and Barclays Bank PLC adding up to 44 per

cent of total assets in this sub-group in 2011 (data from MBA, 2012). Hence, these four banks

represent more than 58.2 per cent of the total banking sector and therefore dominate the total

financial sector.

Although the business models of domestic and foreign controlled banks still differ, local

banks have diversified their activities also by the extension to international markets. Hence,

there is potential for further growth of domestic banks outside of Mauritius. Certainly,

spillover effects from foreign to local banks via knowledge and technology transfers or staff

rotation to train local staff have opened opportunities for local banks that can be realized in

future strategies.

Insurances

The market for insurance companies can also be divided into a domestic and an offshore

section. The companies that are active on the domestic markets run mainly long-term

insurance and general insurance business. Furthermore, a number of insurance brokers and

insurance sales people are acting on the domestic insurance market. The offshore insurance

market includes 13 general and long-term insurances companies as well as four re-insurers

using the GBC1 schemes. The insurance sector also showed significant growth with 5.8 per

cent annual growth between 1990 and 2012. However, the success in the offshore insurance

markets is limited with only a few insurance companies using Mauritius as international

platform. The sector is also a net importer of insurance services accounting for 1.5 per cent of

all service exports and 3.2 per cent of all service imports in 2010. In comparison with the

banking sector, the insurance sector is small with one 10th of the total assets of banks in 2010

(FSC Data).

Non-bank deposit taking institutions and Financial Services

The activities in the non-banking sector is regulated and supervised by the FSC. In 2010,

eleven companies are listed as NBDTIs including six leasing and two lending companies.52

Among those eleven NBDTIs, five are subsidiaries of domestically controlled banks or

51 Including the joint-venture Bank One 52 In September 2012, only eight companies were listed as NBDTIs in BoM Statistical Bulletin

47

insurers. Additionally, FSC records financial services including asset and treasury

management and specialized financial services including factoring and credit financing. With

total assets of 44.2 billion Rupees in NBDTIs (BoM data, annual report 2010/11), 21.1 billion

Rupees in specialized financial services and 2.6 billion Rupees in financial services (data

FSC Annual Statistical Bulletin), all three sub-sectors play a minor role on the overall

financial market. Also, the number of GBC1 companies in this area is limited.

Capital Markets

The IMF reports that despite an overall well-developed financial system in Mauritius

“security markets are shallow” (IMF, 2008, p.9). Nevertheless, the capital markets connect

different actors in the financial markets. Especially the Stock Exchange of Mauritius (SEM),

founded in 1989, with its 87 companies listed and a market capitalization as high as 70.9 per

cent of GDP in 2011 is a key operator in the sector. Domestic banks and insurer as well as

investment funds and global business companies are listed here. The SME also offers

opportunities for international companies to list and trade equity and debt securities in USD,

Euro and GBP and could be a gateway for African companies to foreign currency funding. In

addition, a private trading platform for commodity and foreign exchange derivatives is being

established in Mauritius. Further scope for the growth of the capital markets is given by the

build-up of a well-functioning bond market on the island which has often been advised

recently (Sacerdoti, 2005 and IMF, 2008).

Global Business

The current structure of the global business sector is mainly based on the Company Act and

the Financial Service Development (FSD) Act of 2001 and is in the latter being defined as

"… business or other activity (…) which is carried on from within Mauritius with persons all

of whom are resident outside Mauritius and which is conducted in a currency other than the

Mauritius currency…". The initial types of offshore companies - offshore and international

companies - were continued but renamed as Global Business Category 1 and 2 (GBC1 and

GBC2).53 Because GBC1 companies are regarded as tax residents, they enjoy the benefits of

53 Specified activities for GSC1: aircraft financing and leasing, assets management, consultancy services, employment services, financial services, funds management, information and communication technology services, insurance, licensing and franchising, logistics and or marketing, operational, headquarters, pension funds, shipping and ship management and trading (FSD act, 2001) For GBC2: other than banking, financial services, investment holdings, trusteeship services or other services for companies like office facilities. Source: FSC – Being Licensed, accessed November 2012, <http://www.fscmauritius.org/being-licensed/applying-for-a-licence/global-business-licence.aspx#gbc1>

48

Mauritius’ DTATs and Investment Promotion Protection Agreements (IPPAs) and are

therefore attractive for investment holdings and funds (see Appendix I for a typical

investment scheme in Mauritius). Also Protected Cells Companies (mainly insurances) and

trusts can use the GBC1 scheme. Out of the 9,409 registered GBC1 companies in 2010, 74

per cent were investment holdings and further 8 percent were collective investment schemes

(CIS) or closed-end funds. Contrary, GBC2 companies are defined as non-residents and are

therefore excluded from the DTATs but also exempted from taxes in Mauritius. The main

objective of GBC2 is the holding of foreign assets. From 2001 to 2008 the number of Global

Business companies grew with an average rate of almost 10 per cent per year. While the

number of GBC2s declined by one third since 2008, the number of GBC1s including CIS

increased further (see Table 7). The reason for the large decrease in GBC2 companies is seen

in the financial crisis.

Table 7: Number of registered Global Business Companies

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GBC1 6,142 6,546 6,847 7,261 7,733 8,706 8,761 9,498 9,581 9,409 9,758 off these CIS 221 257 271 293 334 358 478 641 648 741 829

GBC2 10,368 12,803 14567 16334 18,167 20,285 20,999 22,386 18,548 15,725 14,166

Total 16,510 19,349 21,414 23,595 25,900 28,991 29,760 31,884 28,129 25,134 23,924 Source: FSC Annual Reports and Statistical Bulletins

GBC1 enterprises are required to have substance in Mauritius to obtain their tax residency

status with at least two directors, a local bank account, accounting records and statutory

financial statements audited in Mauritius. Contrary, GBC2 companies can only use

management companies as a resident agent.

These schemes are subject to criticism by various international organizations due to many

exemptions for GBC companies compared to local companies, low penalties and fines when

companies fail to comply with requirements and non-public data of accounts reported to the

FSC. Especially, GBC2 companies are seen as critical as regulations are low, secrecy is high

and taxes are zero in Mauritius (NOU, 2009).

As indicated before, the trigger and the driver for the growth in the global business sector

were DTATs, especially with India. However, a correct evaluation of financial flows from

Mauritius to third countries was difficult in the past as data were not consistent throughout

different data sources. Therefore the IMF (2012) reports that Mauritian statistics like balance

of payments (BoP) and international investment position (IIP) statistics need further

49

improvement. Both statistics showed large discrepancies due to the unclear inclusion of the

global business companies in the past. For instance, the balance of payments states for the

calendar year 2010 FDI flows of 4,009 million MUR or 130 million USD from Mauritius to

abroad and excludes all activities of GBC companies.54 Contrary, the Indian Ministry of

Commerce and Industry includes these activities and published that in their financial year

from April 2010 to March 2011, the FDI inflows from Mauritius summed up to 6,987 million

USD or 32.2 per cent of all FDI inflows to India.55 In a first step for higher data quality, the

BoP data from 2011 onwards include estimates for cross-border transactions of GBC1

companies and provide a more realistic picture plus a quarterly breakdown. Hence, for the

financial year April 2011 to March 2012 the FDI outflows from Mauritius are reported as

high as 811,886 million MUR or 28,283 million USD56 of which 99.7 per cent were sourced

in GBC1 companies. Out of this amounts, 9,942 million USD or 35.1 per cent were routed to

India. The same tendency is valid for flows and stocks of portfolio investments. The data in

the Coordinated Portfolio Investment Survey (CPIS) include the offshore sector as the IMF

emphasized the importance of this sector for small island states when the survey was reissued

in 2001 (IMF, 2002). Hence, the data for Mauritius show that portfolio activities are clearly

directed to Asia, especially to India with 65.4 per cent of all portfolio stocks in the period

from 2002 to 2011 compared to China with 4.8 percent and whole SSA with only 3.6 per cent

on average (see also Table 8).The majority of portfolio investments were held in equity

securities (85.5 per cent)57, this is also a reason for the large fluctuations in the data. The

growth trend peaked in 2009 and the value of holdings especially in India declined thereafter.

54 BoM, Monthly Statistical Bulletin Jan 2012 55 Fact Sheet on Foreign Direct Investment - Indian Ministry of Commerce and Industry department of industrial policy and promotion, accessed November 2012, <http://dipp.nic.in/English/Publications/FDI_Statistics/2012/india_FDI_August2012.pdf> 56 Exchange rate of 2011, WDI data 57 Many mutual funds investing in the Indian equity market are registered in Mauritius.

50

Table 8 : CPIS Total Portfolio Stocks in million USD

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total 17,128 26,612 39,030 54,834 81,550 154,645 131,078 181,584 176,948 128,886

change in % - 55% 47% 40% 49% 90% -15% 39% -3% -27%

in India 7,309 14,530 22,974 39,136 61,779 110,686 101,206 140,733 120,026 73,319

in China 432 1,124 1,111 4,887 6,148 4,159 5,809 10,569 5,722 7,399

to SSA 2,078 702 1,654 647 1,447 5,198 3,414 8,126 3,295 2,480

Source: CPIS Data

Similar to FDI flows, BoP and IIP were not consistent with these data on portfolio

investments58 as global business was not included, although in CPIS data 98.5 per cent of

total foreign portfolio investment came from the global business sector in Mauritius (BoM

Annual report 2010/11).

The renewed BoP data in 2011 and 2012 show the magnitude of financial flows that are

routed via Mauritius but also the limited impact of these flows on the domestic economy. FDI

inflows to Mauritius in 2011 totaled to 273 million USD or 2.42 per cent of GDP. The FDI

inflows to GBC1 companies were estimated at 37,487 million USD or more than three times

the annual GDP. Also the total CPIS assets in 2011 account for more than 11 times the

domestic GDP of Mauritius. Obviously the tax incentives are a major driver for the sector and

so the tax revenue from global business is a minimal fraction of the total financial flows. The

IMF (2008) estimates that 25 per cent of corporate tax comes from global business which is

equal to approximately four per cent of Mauritius’ total tax revenue in 2009 and 2010.

Furthermore, the distribution of the global business sector to GDP was estimated to be around

3 per cent in the last years (BOI, 2012). In the updated national accounting standards services

in the offshore sector are included in the sector Professional, scientific and technical activities

that accounts for 4.6 per cent of GDP in 2012 (CSO data, National Accounts). Although this

sector can be seen as growth driver since 2009, the impact is still small compared to the

magnitude of financial flows. The same is true for the employment effects associated with the

global business sector. So far, only the employment of 2,216 persons in management

companies in 2010 can be used as direct effect. According to FSC, a detailed analysis of 58 Technically IIP portfolio data and CPIS data should be the same. However, in the IIP of 2010 portfolio holdings of 2,559 million USD (BoM Annual report 2010/11) were reported in contrast to CPIS with 176,948 million USD.

51

employment effect is currently conducted.

These limited effects of global business on the domestic economy are indicators that the

global business is mainly characterized by administrative operations and passive investments.

Hence, a future strategy for the financial sector needs to seek for potential upgrades to

business activities with high value addition, especially in the global business section.

Overall, the financial sector is dominated by commercial banks. Especially foreign controlled

banks increased their offshore activities targeting mainly the African and Indian market. But

also domestically controlled banks expanded their business activities towards international

transactions. Consequently, the contribution of banks increased from 5.1 per cent of GDP in

2005 to 6.1 per cent in 2012. Other domestic financial sectors lag behind that development:

the insurance industry, for instance, could only increase its contribution to GDP from 2.8 per

cent in 2005 to 3.0 per cent in 2012 (CSO data, National Accounts). Also the global business

sector and the associated tremendous financial flows still have a limited impact on domestic

economic performance and on service exports.

Although the exports of insurance services increased by 770 per cent in real terms from a low

base between 2005 and 2010 (UN Comtrade data), the insurance sector is still a net importer

of services. Contrary, Mauritius is a net exporter of other financial services. However the

amount of the surplus is small relative to other service exports. In 2009, the net surplus

summed up to 40 million US Dollar compared to surplus in the tourism sector of 740 million

US Dollar. Hence, the task for further development of the financial industry is also the

increase in financial service exports. All financial sub-sectors certainly have scope for higher

value addition in the future. The major potentials and risks of such a growth strategy will be

analyzed in a SWOT analysis.

52

iii. SWOT Analysis

Based on the sectoral overview on the financial industry and the interactions between the

participants in the markets, we continue the analysis with the discussion of strengths and

weaknesses of the Mauritian financial sector. The analysis is with regard to the major strategy

for the financial sector by the government that see Mauritius as platform for financial flows

from Asia to Africa and vice-versa.

Table 9: SWOT diagram financial sector

Strengths Weaknesses

Experienced and proven jurisdiction

No restrictions on capital flows and exchange

rates

Good regulatory and institutional base

Network of DTATs and IPPAs

Fiscal incentives for GBC companies

Convenient time zones

Compliance with international standards

Long-term good relation to Asian and African

countries

Limited expertise and lack of skilled work

force

Connectivity (ICT infrastructure and flights)

Limited securities markets

Dependence on India’s tax regulations

Highly concentrated domestic banking

market

Opportunities Threats

Hub for trade and financial flows from Asia to

Africa and vice versa

DTATs with potential growth markets (India,

China and many African economies)

More DTATs and IPPAs with African

countries

More spillover effects from Global Business

to domestic players

Links to other sectors (ICT, Real Estate,

Tourism, etc.)

International expansion of domestic financial

Cancellation of DTATs and IPPAs

Critique on fiscal incentives

Insufficient regulation and supervision and

associated reputational risks

Competition from other countries

Competition for local companies from

international companies

Limited growth of markets in Asia and

Africa

53

players

Improve reputation as IFC

Certainly, Mauritius is an international financial center with unique strengths that bears a

long-term growth potential for the whole economy. Firstly, several specifications like the

cultural and economic ties to India, China and parts of Africa and the geographical position

as connection point between Africa and Asia create a precondition for a gateway for trade

and financial flows from and into these regions. The experience of the past proofs that these

linkages have help Mauritius to grow, for instance in the textile industry. Secondly, Mauritius

actively promoted its reputation as a stable and reliable location for offshore banking and as

low-tax platform for investment in emerging markets for more than two decades. The legal

and regulatory framework was continuously updated also inspired by liberal examples from

New Zealand and fulfills international standards to a high degree. This investor friendly

environment is further accompanied by no restrictions on capital flows and exchange rates

and fiscal incentives. Mauritius has a flat tax system with a tax rate of 15 per cent for

residents with several exemptions like no taxes on capital gains and dividends. These tax

benefits are also valid for foreign owned global business companies and applicable in bi-

lateral DTATs. The prominent example is certainly the agreement with India but Mauritius

has also a growing number of treaties with African countries including South Africa, Senegal

and Kenya. Additionally, Mauritius offers 22 IPPAs that protect investments by Mauritian

residents from expropriation in the contracting countries.

However, there are major concerns about the possibility for Mauritius to upgrade their

financial sector. As current weakness, the limited expertise and the related lack of skilled

work force can be named. Especially, the fact that global business activities resulted mainly

in low-value-added services like accounting or administration is associated with limited

expertise. The missing highly skilled work force can limit the speed of potential growth

(IMF, 2008, p 18). This situation in the financial industry can be related to the general

discussion about ‘middle-income’ traps that were also related to the quality of the education

system (see chapter IV). Moreover, experts see the limited connectivity with regards to costs

and reliability of telecommunication and inadequate flight connections to African trading

partners as a restriction for the financial industry (MCB, 2012b). As indicated before, the

securities markets in Mauritius need further improvement and more expertise with multi-asset

trading platforms and derivatives trading to attract businesses like fund and asset

management and to increase service exports in that sector. Also the dependence on the DTAT

54

with India and highly concentrated domestic banking sector can be identified as major current

weaknesses.

The strategic track for the financial sector in Mauritius is inter-connected with the growth

prospectus of East Asian, South Asian and African economies as Mauritius sees itself is an

investor into these markets (mainly domestic banks) and a platform that enables financial

flows into these regions. Besides the positive outlook for the major Asian economies, the

focus for Mauritius lies on Africa due to the close relationship to African economies and the

high expectations towards the growth prospects. As the World Bank estimates in 2010 “that

Africa could be on the brink of an economic takeoff, much like China was 30 years ago, and

India 20 years ago”, Mauritius could be a complementary part of Africa as gateway for

investment. The existing and future DTATs and IPPAs could be used as a catalyst for these

international financial flows. Current data indicate the orientation towards Africa as in the

first half of 2012 47 per cent of newly registered GBCs in Mauritius had an African

investment mandate.59 The crucial task for the Mauritius financial sector is to upgrade its

reputation as international financial center and to generate high-value-adding services in

Mauritius like private banking, asset management or investment banking services. The high

quality of Mauritian institutions could give the country a long-term comparative advantage

especially compared to other SSA economies. Moreover, the financial sector has also

potential inter-connections with other local sectors like the ICT sector and with real estate

and tourism that can both profit from asset management activities for high-net-worth

individuals (HNWI). Also the further international expansion by domestic companies into the

Asian and African countries could lead to future growth of the sector and financial advisory

services in other developing economies could boost financial service exports.

However, the major threat for the growth potential of the financial sector is the cancellation

or changes of the DTATs. Although the Mauritian government protects the DTAT with India

with the argument that it is beneficial for both parties (Budget Speeches 2011 and 2012),

there is continuous bilateral discussion about the agreement due to negative impacts like

“round-tripping” – money from India is re-invested via Mauritius into India – and problems 59 Board of Investment – Mauritius National Budget 2013 Highlights, accessed November 2012 <http://www.investmauritius.com/Budget2013/financial.html?utm_source=edirectpost_marketing_system&utm_medium=email&utm_content=17388327&utm_campaign=Mauritius%2520National%2520Budget%25202013%2520Highlights>

55

with black money appear. Also the fact that due to the DTAT an estimated 600 million USD

of profits flow tax free to international investors each year, might lead to changes in the

agreement in the future (Rizwan, 2012).60 Recently, India introduced a General Anti-

Avoidance Rule into their Finance Bill 2012 stating that Indian tax authorities can deny

double taxation treaty benefits to foreign investment funds if their intermediate holding

companies have the only objective of tax avoidance (KPMG, 2012). The consequences are

not clear so far as GBC1 companies could be accepted to have commercial substance in

Mauritius, but there is already news that funds based in Mauritius were switched to

Singapore.61 Still, the political will on both sides seems to be very high to maintain the treaty

based on the traditional business network between the two countries. These negative side

effects might also affect current and future DTATs with other countries and lower the

incentives for foreign investors to use Mauritius as a platform. Furthermore, the low-tax

environment and the structure of the global business sector with the tax-free GBC2

companies might re-start a discussion about Mauritius as a tax-haven and lower its reputation

as an international financial center. Moreover, Mauritius is in competition with other

countries like South Africa that offer similar schemes for investments into Africa, like

regional headquarter schemes or Singapore that has similar DTATs with India and China.

Still, the long run lower as expected growth or social unrests in Asian and African countries

could negatively affect international financial flows into these regions and limit the prospects

of the domestic financial sector.

Overall, the major challenge for Mauritius remains the task to upgrade its services to high-

value-added activities. In the next section, possible business fields are discussed.

iv. Potential growth strategies

Several publications discuss possible actions and business fields that could be considered to

make a shift form “passive, low value-added account management to productive, substantive

high-value added international financial services” (Mistry and Treebhoohun, 2009, p.62) in

the Mauritian financial sector.

60 By applying an “ad hoc” method used by the NOU (2009), the estimated volume invested in India via Mauritius is equal to CPIS data plus the FDI inflows since 2000 and adds up to 140 billion USD. When an annual return of 10 percent is assumed, the profits from investments in India would account to 14 billion USD per year. Parts of these profits would not be taxed in India and only to a low extent, if at all, in Mauritius. 61 The Economic Time, accessed November 2012, <http://articles.economictimes.indiatimes.com/2012-04-25/news/31398993_1_india-mauritius-dtaa-private-equity-funds-capital-gains-tax>

56

Sacerdoti (2005) and UNCTAD (2008) emphasize opportunities for Mauritian domestic

banks and other financial service companies to increase their presence especially in African

countries. Hence, these financial players could then benefit from the increasing trade and

financial flows in the region and further inter-connect other Mauritian companies from

sectors like textiles or tourism to the region. Especially MCB and SBM follow already such a

strategy and both or one of them have subsidiaries in India, Mozambique, Madagascar,

Seychelles and other countries in the region. In 2011/12 for instance, SBM generated 30 per

cent of revenues from international business (SBM, 2012). Additionally, domestic banks can

diversify their portfolios internationally in order to avoid high concentration of credit with

few domestic borrowers or sectors.

One of the most promising developments for the financial sector could be services for HNWI

in the form of wealth management which includes investment advisory and asset

management. Especially, the interconnection with security markets, global business, real

estate and tourism could generate a broader impact on the economy. Although management

companies and banks offer several services in this area, there are possibilities for Mauritian

companies in regard to the growing global wealth management industry.

Figure 20: Wealth of HNWIs by regions in trillion USD

Source: Cap Gemini Wealth Report 2006 and 2012

Overall, the global wealth is expected to growth in the up to 2016 by 4.3 per cent per year

(BCG, 2012). The financial wealth of HNWIs is even estimated to grow by 6 per cent, the

wealth of Ultra High-Net-Worth Individuals (UHNWI) by 8 percent annually. In total the

financial wealth in the hands of HNWI could increase from 49 trillion USD or 40 per cent of

USD 28.4

USD 33.4

USD 42.1

57

global wealth to 66.5 trillion USD or a share of 44 per cent (calculated with BCG data, 2012).

Especially the Asian-Pacific region will see an increase in financial wealth and a number of

HNWIs even after the region caught up to the level of established regions Western Europe

and North America in the last decade (see Figure 20). Given the historical ties to India and

China, Mauritius might benefit from the surge in private wealth in these economies as China

will account for 35 per cent and India for 10 per cent of increase in global wealth between

2011 and 2016 (BCG, 2012). Especially the number of millionaire and UHNW households

should increase further in these regions. As argued before, HNWIs often used offshore

centers for the management of their financial investments. While Switzerland, the largest

offshore center declines due to new transparency and withholding tax agreements, the major

beneficiaries of the changes in wealth growth and distribution were Hong Kong and

Singapore where mainly private financial wealth from Asian-Pacific customers is managed

(BCG, 2012). These two centers have already established a substantial financial community

and offer similar low-tax investment schemes like Mauritius. Nevertheless, Mauritius could

find its own niche in the wealth management industry by specializing in the African

investments also for Indian and Chinese investor based on its various DTATs and IPPAs, and

the service for the growing number of African HNWIs.

In the value chain of the wealth management business (see Figure 21) Mauritius is mainly

active in support functions like finance and accounting or back office services. Although a

number of banks offer full wealth management and management companies provide tax

planning and other advisory services, further measures seem necessary to establish a broader

wealth and asset management industry with full services. Currently, FSC registers only five

asset management companies including three GBC1 companies (FSC, 2011).

Figure 21: Wealth Management Value Chain

Source: Gap Gemini and RCB World Wealth Report 2012, p. 32

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Two different ways are possible to enforce such a path for wealth management in Mauritius.

Firstly, more international financial firms could be attracted to provide their services from

Mauritius. Indeed, many leading global wealth managers have already subsidiaries in

Mauritius but mainly as passive investment holdings due to tax reasons that have only limited

economic impact for Mauritius. In 2008, the United States Government Accountability Office

(GAO) published a list of subsidiaries in tax havens or tax privacy jurisdictions owned by the

100 largest publicly traded U.S. companies, including the banks that are the top U.S. wealth

management firms 62 like Bank of America/Merrill Lynch, J.P. Morgan and Morgan Stanley.

These companies have subsidiaries in Mauritius, even as many as in Singapore or Hong

Kong. However, it is uncertain if these companies are willing to operate more visible from

Mauritius. Secondly, alternative business models like external wealth managers could be

applicable in Mauritius. In a report BCG (2012) also describes different business models like

family offices to serve a few specific customers or online wealth managers. These

independent advisors could use the existing services of local and international banks plus the

support services already offered in Mauritius in the global business sector. Furthermore, the

customer acquisition could be combined with the fact that Mauritius is a high end holiday

destination that also offers real estate investment schemes for HNWIs.

Mauritius has the potential to be platform with full wealth and asset management services as

the legal and regulatory framework provides various possibilities for wealth managers

including trusts or foundations. Especially, the niche for investments into Africa including a

number of tax benefits could attract wealth managers. However, it is necessary to ensure that

the full value chain in wealth management should be offered. For that reason, investment into

the infrastructure and the avoidance of reputational risk is necessary.

Overall, the financial sector has multiple fields to develop like treasury and risk management

for multi-national companies, investment banking services or Islamic banking and finance –

mostly in association with the access to African markets. Given the stable and reliable

environment, Mauritius can be used as low-risk entry point to these emerging economies.

62 Barron’s Top Wealth Management Firms 2011, accessed December 2012, <http://online.barrons.com/article/SB50001424052748704429004576601890176191146.html>>

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v. Conclusion

Since the early 1990s, the financial sector in Mauritius has seen an impressive development

and is an important contributor to the GDP growth in the recent years. Especially, the former

offshore banks and the global business increased significantly and had a positive influence on

the growth of local financial firms. Due to bilateral DTATs with several emerging markets –

many of them already negotiated in the 1980s – made Mauritius a major destination for

international financial flows. Like in the successful international financial center Singapore,

financial intermediation has already a high share of GDP of more than 10 per cent. However

the main difference to successful financial centers like Singapore is that Mauritius is often

only a pass-through station for these flows with limited impact on the local economy. Hence,

the financial industry is also still a net importer of financial services and is thus not able to

balance the current account deficit of Mauritius. Therefore it is crucial for the financial sector

to upgrade from low value-added services to more sophisticated activities. The limitations for

growth in the long-run are the dependence on DTATs, the reputational risks and the limited

experienced work force in the country. Additionally, the financial industry might adopt

structures in the financial sector that is very risky and unstable and the whole economic

structure might be to biased towards financial services.

Overall, the Mauritian financial sector still offers growth opportunities in the near future

especially in the securities markets and the domestically controlled banks but long-term

growth also depends on external factors like international financial flows and the growth

potential of Africa.

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2. The Information and Communication Technology Sector

Changes in the technological landscape have brought about the integration of information

technology (IT) and communications technology (CT), which is now referred to as the field

of information and communications technology (ICT). The World Bank describes the field of

ICT as consisting of “hardware, software, networks, and media for the collection, storage,

processing, transmission and presentation of information (voice, data, text, images), as well

as related services”63. With the increasing volumes of cross border trade in services, the novel

fields of IT enabled services (ITES) and IT services (ITS) have become major elements of the

ICT sector. ITES span a broad spectrum of services which are offered remotely facilitated by

communication networks, these range from contact centers, technical support services,

accounting services to other professional services. On the other hand, ITS are linked to

electronic networks and pertain to services falling under the broad categories of IT

applications and engineering services (Sudan et al., 2010, p.2).

Today, the ICT sector has become increasingly important in both developed and developing

countries. Globally, governments have noted the potential for their countries to advance with

the proper use of this sector. According to the World Bank (WB) there are great prospects for

economies to progress through higher productivity, competitive industries, increased

employment, enhanced export markets and gains from decreasing poverty levels (WBG,

2012). Moreover, several developing countries (such as India, Philippines and El Salvador64)

have benefited from the expansion of the subsector of ITES and ITS. The potential of the IT-

based services market is estimated to be approximately 800 billion US Dollars annually of

which there is still a third to be explored and captured by existing or new market entrants

(WBG, 2012, p.16). Thus, the magnitude of benefits which could be derived from this sector

quantifies it as a modern viable engine of economic growth for countries willing to

adequately tap into the possibilities it presents.

The Mauritian government has also realized the benefits of the focus on the digital society,

and in the late 90s identified it as a new sector to develop in order to sustain economic growth

and to bring about the so called “new economy” (MRC, 2001, p.2). This was with the vision 63 World Bank ICT Glossary Guide – 100 ICT Concepts, accessed January 2013, <http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/0,,contentMDK:21035032~menuPK:282850~pagePK:210058~piPK:210062~theSitePK:282823~isCURL:Y,00.html> 64 According to the WB it was traditionally developing countries like India and Philippines which benefitted from IT services and ITES global market, however new smaller countries such as El Salvador, Dominican Republic and Mauritius are taking advantage of the opportunities presented by this industry (WBG, 2012, p.17).

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that this emerging sector would revolutionize the traditional economic model, which would

then lead to greater prosperity in all areas of society and release the potential to ascend the

value chain (ICTA, 2009). For Mauritius, tapping into the ICT sector would provide for gains

in not only in employment but in GDP and exports. Additionally, it was meant to build a

spirit of innovation and entrepreneurship, and most importantly, it would capitalize on the

country’s main resource, that of its human capital. In 2012, it was reiterated by the Mauritian

government that even though the economy had already experienced and achieved

considerable economic and social progress, the need to grow beyond a middle income

economy required the search for new potential avenues to leverage greater economic gains

(GOM, 2012, p.7). It is with this in mind that Mauritius is keen on placing itself as a top

ranking regional ICT hub and as such has created and continues to improve a dynamic

framework for it to achieve such ranks.

Today, ICT is one of the island’s youngest sectors; however despite its nascent nature, its

energy and potential are not ignored. It is now considered as an important pillar of the

Mauritian economy contributing an estimated 6.5 per cent of value added to GDP in 2012

(BOI, 2012). In addition to this, it is considered as a real driver for growth with an annual

growth rate sustained at double digits over the past 8 years, with estimates of the CSO

claiming this to be at a rate of 13 per cent annually (CSO, 2012; BOI, 2012).

The sector is therefore worthy of analysis as a potential strategic sector for further growth in

Mauritius. Amidst the positive trend of the sector challenges have presented themselves

which can affect its future possibilities. As such, the review of the sector will examine its

brief history, the conditions of its enabling environment and its current situation. Finally, in

order to explore the prospects of the sector as a strategic pillar of Mauritius’ economy a

SWOT analysis will be applied.

i. The history of the ICT sector

The Mauritian ICT industry can trace its beginnings to 1883, when the first telephone line

became available on the island (ICTA, 2004, p.1). However, the convergence of

telecommunications, information technology and broadcasting was only realized with the

establishment of a Ministry of Information and Communication Technology (MICT) in 1997.

At this time there was already an existing National Computer Board (NCB)65 which was

65 Since 1988

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primarily focused on the development and support of information technology (IT).

Nonetheless, the creation of the ministry afforded the opportunity to oversee at a sectoral

level the combined elements of telecommunications and IT. Hence, the ministry’s main goal

was to enrich the lives of citizens and the economic health of the nation through the merger

of these two elements (MICT, 1997, pp.16-20).

Why the focus on this new sector? The impetus can be linked to 1994. With the impeding

effects of the WTO regime, it was acknowledged that there was a real threat to the trade

preferences enjoyed by the existing pillars of the Mauritian economy. This potential threat

combined with ‘the island’s limited resources, the international pace of technological

progress, the rise of new low-cost competitor countries, the implementation of further global

non-tariff barriers and alterations to commodity and financial markets’, were all forces which

required an appropriate response by Mauritius (ICT Policy, 2007, p.5). Consequently, a new

way forward was sought by both the public and private sector. The result of this was the

transformation of ICT into a critical element in the economic landscape of the island to

ensure that Mauritius could survive the challenge of sustainable development. To this end,

Mauritius developed a clearly focused strategy on the development of ICT and its promotion.

The government in the initial stages was keen on promoting the island as an ‘information

based’ economy by using IT to leverage the competitive advantage of existing sectors. In

order to do this, the establishment of the MICT was not done in isolation; the government

simultaneously developed a policy guide in the form of a national strategic plan. Thus, by

1998 the government was equipped with a plan for the next six years with the aim to become

an information-based economy. The focus at that time was to position the country as a

regional ICT hub; and to establish the island as both an IT exploiter and exporter (MICT,

1997, p.16). For Mauritius, it was important that IT would allow the island to remedy one of

its main economic disadvantages: its geographical remoteness (MICT, 1997).

One of the first milestones to be achieved for the sector was the full liberalization of the

telecommunications market which took place in 2003. This date is crucial for the sector as

most developments and tracking of changes are measured from 2004, the year subsequent to

liberalization (Oolun et al., 2012). The government with its new focus on ICT, acknowledged

that the sector required a reform and that the success of ICT relied in a major part on

telecommunications being competitive. It was noted that a competitive telecommunications

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market would lay the foundation for better market conditions and allow the development of

the entire industry (MRC, 2001, p.3).

Since 2003, the government has placed a concerted effort on the establishment of ICT as

contributor to the economic health of the country. The government has thus focused on

creating a solid regulatory framework, implementing appropriate legislation, providing

technical infrastructure and capacity building. Mauritius has therefore profited from many

changes to its ICT environment which promote ICT acceptance, ease of operation and

attractiveness to foreign investors.

Building an enabling environment for ICT

According to the World Bank (2012, p.ix), the enabling environment is one that is

characterized by the necessary elements which act as support structures to attract investors.

By extension, for a country to fully benefit from ICT or to establish itself as an ICT hub the

environment should be conducive for the efficient operation of the sector. By means of a

process deliberately undertaken by the Mauritian government the environment for ICT has

evolved considerably since the establishment of the MICT. Core elements of this so-called

“enabling environment” can be considered to be a robust policy and regulatory framework,

appropriate technical infrastructure, accessibility and usage of ICT and features of the

available talent pool. This is represented in Figure 22.

Figure 22: Core elements of the ICT enabling environment

Source: Adapted from WEF and INSEAD, 2012

Mauritius is considered to have a fairly sophisticated ICT environment and more

impressively, one that has rapidly developed in less than 20 years. Already, in 2012 Mauritius

was considered the leader in its region placing 53rd on the global Networked Readiness Index

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(NRI) and the only African country to have a place in the top half of the rankings (WEF and

INSEAD, 2012). The next African nation to follow Mauritius was South Africa which ranked

at 72nd place. This index measures the degree to which economies across the world leverage

ICT for enhanced competitiveness based on four core factors such as usage, impact,

environment and readiness (WEF and INSEAD, 2012, p.3)66. When comparing Mauritius to

other competitor developing nations such as India, Philippines67 and Malaysia, it is only

Malaysia at place 29 which ranks higher than Mauritius on this ranking (WEF, 2012, p.xxiii).

Mauritius also ranks on the ICT development Index (IDI), which is the ‘composite index that

combines 11 indicators into one measure that compares and monitors developments in ICT

across countries’ (ITU, 2012, p.15). Similar to the NRI, the IDI is based on a three-stage

model, which consists of the (i) level of infrastructure and access to ICTs, (ii) level of

society’s usage of ICTs and (iii) impact of proper usage of ICT. On this indicator Mauritius

still ranks moderately well at 74th place in 2011 and compared to its regional counterparts it is

only surpassed by Seychelles which ranked at 70th. Similarly on this index it has a better

position than major competitors like South Africa and India68 (ITU, 2012, p.21).

- Policy and regulatory framework

With respect to the policy and regulatory framework, Mauritius ranks in the top 50 of the

NRI with a place at 39. Also, the general environment for entrepreneurship and innovation

are well satisfied as it ranks as well in top 50 on this sub-index of the NRI (46th). The policy

and regulatory framework has been driven by well laid out plans of the Mauritian

government. Since the realization of the need to explore this sector the government has

developed three national strategic plans (NITSP 1998-2005, NICTSP 2007-2011 and

NICTSP 2011-2014) which provide a guide for the policy actions of the industry. In addition

to this based on the ICT Act 2001, the ICT Authority (ICTA) was established as the general

regulatory body of the industry. Subsequent to the first two NICTSPs, the latest NICTSP

2011-2014 highlights the challenges the industry faces and gives direct policy guidance to

ensure that the government can achieve its goal to elevate the island to a high-income

economy with ICT as an enabler of this process. There have been several policies

implemented, various acts and regulations developed which have strengthened the Mauritian

ICT environment. These policies range from the outlay of guides for the telecommunications 66The Network Readiness Index is developed from four sub-indexes namely 1) environment for ICT 2) the readiness (based on affordability, skills and infrastructure) of society to use ICT 3) usage of ICT by primary stakeholders 4)economic and social impacts of ICT (WEF and INSEAD, 2012, p.6) 67 India ranks 69th whilst Philippines ranks 86th on the Networked Readiness Index 68 South Africa ranks 91st and India 119th on the ICT development Index

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market, internet service providers, open access and the latest related to the use of broadband.

The legislative construct also exists to maintain Mauritius as a viable and safe location to

conduct business. This is illustrated through the adoption of acts such as the electronic

transactions act (2002), the computer misuse and cybercrime act (2003) and the data

protection act (2009). Over the past 24 years there have been more than 20 acts and

regulations developed directly concerning the sector which positions Mauritius well with

regard to international best practices.

The government also acts in providing an environment to promote both local and foreign

participation in the market. This can be illustrated by two main schemes, the ICT incentive

scheme implemented in 2002 and the ICT incubator program which came into operation in

2003. The ICT incentive scheme 2002, provided firms in various segments of the ICT sector

with benefits in the form of ‘reduced corporate tax, duty free import of equipment, tax

exemption on dividends and reduced tariffs for electricity’ (MICT, 2000, p.15). The incubator

program on the other hand, with its focus on the promotion of local ICT start-ups, facilitates

those interested in starting an ICT related business with the necessary advice, infrastructure,

logistics and capacity building support required in their early operational stages69. The many

strategies and activities of the government are extensive and thus, demonstrate the continuous

attempt to provide the appropriate environment for the sector.

- Infrastructure

For ICT to be successful the necessary infrastructure and connectivity needs to be developed

and maintained. Namely, infrastructure such as ICT industrial parks: this is exemplified in

Mauritius by the Ebene Cyber City which towers the plains of central Mauritius and became

operational in 2004, now occupying a space of 152 acres with 33 intelligent buildings

containing 387,000m2 of office space. The entire Cyber City has access to high bandwidth

international connectivity essential for ICT operators. This connectivity is through advanced

broadband architecture that is a gigabit-capable passive optical network-fiber-to-the-business

(Oolun et al., 2012, p.163). With respect to international connectivity, Mauritius benefits

from two international bandwidth gateways70. The island was first connected to the South

Africa Far East (SAFE) submarine fiber optic cable in 2002. This links the island to Europe

via South Africa by connecting to the South Atlantic 3/West Africa Submarine Cable 69 Sourced from ICT incubator homepage, accessed December 2012, <http://www.gov.mu/portal/sites/incubator/About.jsp> 70 International bandwidth refers to the maximum quantity of data transmission from a country to the rest of the world (ITU, 2012)

66

(SAT3/WASC). SAFE also provides connection to Asia via India and Malaysia. In 2012, yet

another milestone for ICT infrastructure as Mauritius connected to Lower Indian Ocean

Network 2 (LION2), the extension of the LION1 which the country had previously connected

to in 2009. The LION2 with its landing station in Kenya links to the Eastern African

Submarine Cable System (EASSy), thereby allowing for further capacity on the internet

gateways71. This connection to two gateways gives operators a sense of security as

connection possibilities are no longer only limited to the SAFE connection but an alternative

gateway is now available. Despite these achievements, there is still need for improvement

with respect to infrastructure. Based on the NRI 2012, infrastructure in Mauritius was ranked

in the 73rd position out of the 142 countries. This mediocre ranking implies that although

developments have taken place, improvements are still necessary for the country to boast of

world class ICT infrastructure.

- Accessibility and ICT usage

The accessibility and usage of ICT is most commonly measured by the mobile penetration

and internet penetration. The internet penetration rates in Mauritius have improved with

subscription rates increasing from 6.3 per cent in 2004 to 28.7 per cent by the end of 201172.

This signaled an increase, however, there is considerable room for improvement on the

indicator. This is also partly responsible for the low individual usage of the internet with just

30 per cent of persons being recorded as using the internet73. Nevertheless, broadband

internet74 subscriptions have been on the rise with subscriptions per 100 inhabitants

increasing to 21.7 in 2011 and the majority of which originate from mobile subscriptions. The

trend of broadband internet subscriptions illustrates the fact that there has been a rapid

adoption of mobile services on the island; mobile subscriptions have increased from a mere

71 This is as per details outlined on both the Mauritius Telecom homepage, Orange news report and the Board of Investment’s page, accessed February 2013, <http://www.mauritiustelecom.com/wholesale_services/upcomings.htm> ; <http://www.orange.com/en/news/2012/juin/LION2-cable-arrives-bringing-broadband-to-Mayotte> and <http://www.investmauritius.com/ICT2.aspx> 72 ICTA figures 73 2010 figure from Continuous Multi Purpose Household Survey (CMPHS) 74 Broadband internet in Mauritius as recorded by the CSO is defined as 128kbps for the reporting period of 2004 to 2006 and then redefined in the latest statistics from 2007 to 2011 to 256kbps. This change in the definition reflects conformity to the prescribed speed by the International Telecommunication Union (ITU) and adheres to international references to broadband.

67

44 per 100 inhabitants in 2004 to 100 in 2011.75 The trend of ICT access in Mauritius from

2004 to 2011 is shown graphically in Figure 23.

Figure 23: Trend of ICT access in Mauritius from 2004 to 2011(per 100 inhabitants)

Source: CSO

Overall on the NRI usage sub-index which is a score from 1 to 7 (7 being the best), Mauritius

scored a mere 3.6 (ranking 64th) in 2010 indicating that the issue of usage is still a challenge.

The government through the NCB has set up several initiatives to address this, namely,

cyber-caravans, public internet access points and computer clubs to inform and sensitize the

public of the purpose and benefits of ICT.

- Talent pool capacity building

Combined with the other elements of the enabling environment, the availability of potential

employees with sector specific skills has significant influence on the success of ICT and its

subsectors. Unfortunately the case for Mauritius is that this element of the environment has

ranked poorly. The situation is aggravated as there is the natural limitation of a small

population, coupled with the limited number of graduates in the field of ICT. Both the

Gartner report (2010) and the NRI (2012) give the island state a merely satisfactory ranking

concerning the labor force. As

Figure 24 illustrates, since 2007 the estimated percentage of students enrolled in ICT or an

ICT dominated field at tertiary level has progressively declined. During the period of 2005-

2007 this rate was above 10 per cent, however, since then it has not crossed 9 per cent, with

the value being 8.4 per cent in 2011. Although, in 2011 the overall enrolment of 3,878

showed an increase from previous years and surpassed the value from 2007 which was 3,700,

75 The data may be misleading as SIMS sold is equated to the number of users, however there is multi-sim usage in Mauritius, thus meaning penetration rates may be overstated.

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all years prior to 2011 showed a real decrease in enrolment. Enrolment rates also affect the

potential supply of professionals to the market, which followed a similar trend to enrolment

rates, experiencing the same minor increase in 2011 which may be a signal of another spurt

of greater interests in the field.

Figure 24: Supply and potential supply of graduates (right axis) for the ICT industry 2006 to 2011

Source: NCB Indicators Portal, 201276

Although general tertiary level enrolment rates have improved77, Mauritius when compared

to countries of a similar income classification performs at the lower end of the spectrum. The

Joint Economic Council (JEC), the main private sector representative body already identified

in 2001 that education would pose a threat to the potential of the so-called available talent

pool for the industry. However, according to Everest (2009) it is possible for Mauritius to

supplement this drawback of low tertiary level graduates, by taking advantage of its

secondary school leavers as these persons can be trained to attain industry standard. Based on

this assumption, one of the most critical characteristics of the talent pool is thus its

trainability. One essential attribute of the talent pool to which attention must be drawn is its

bilingual nature, as a result of the historical development of Mauritius both French and

English are spoken and as such markets where either one of these language skills are required

can be served.

In an attempt to address the inefficiencies of the Mauritian human capital, the government

has proceeded to transform education and training possibilities. The ICT skills development

76 INCB Indicators Portal, accessed November 2012,<http://www.gov.mu/portal/sites/indicators/stats_Manpower.html> 77 Tertiary enrolment rates in 2011 were 32 per cent compared to 10 per cent in 2000 (WB Databank, 2012)

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program78 which aims to provide work experience and training to both unemployed young

people who have secondary level education or higher and university students, is one such

program. This initiative also requires firms to retain at least 50 per cent of those completing

the traineeship. In addition to this, the ICT Academy which was envisioned by the

government to act as a coordinating body for industry training launched in 2012 an online

training program for potential software developers in collaboration with Accenture and the

Massachusetts Institute of Technology (MIT). The program is fully subsidized and targets

young unemployed individuals, who are deemed by the government as the potential cohort to

fill the existing skills gap. This again is driven by a deliberate government intention to

promote Mauritius as an incubator for application developers (Budget Speech – Minister of

Finance, 2013, p. 11).

The enabling environment in Mauritius is one that is complex and its enhancement is

facilitated by several government initiatives. The four identified components of the enabling

environment have varying levels of achievement. The regulatory and policy framework

seems to be the strongest aspect. By contrast, the other three factors still require the necessary

improvements that will render Mauritius as a true world class ICT hub.

ii. Overview and current structure

Today the Mauritian ICT sector is one of the major pillars of the economy and has caught the

attention of both local and international observers. In 2009, Doniger and Sudan (p.112)

described Mauritius as a benchmark for other developing countries when considering the

progress made in the ICT sector. Additionally, in 2010 Gartner placed Mauritius for the first

time on its list of top 30 locations for IT offshoring. According to the Minister of ICT, the

progress of the sector will continue and it is the goal of the ministry to consolidate ICT as a

true economic contributor by facilitating its ascension to the first pillar of the economy. This

goal is seemingly over-ambitious, yet it is based on the current momentum witnessed in the

sector. This then brings the discussion to what is referred to as ICT in the Mauritian concept.

In order to properly evaluate the current state of the sector, the definition of ICT as employed

in Mauritius should be understood. Based on all references the official definition of ICT

conforms to international standards. The ICT sector in Mauritius as described by the ICTA

includes “manufacturing and services industries, whose products capture, transmit or display

78ICT Skills development program, accessed December 2012, <http://www.gov.mu/portal/sites/manpower/index.jsp>

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data and information electronically. It includes related activities of manufacturing, wholesale

and retail trade, communications and business services such as call centers, software

development, website development and hosting, multimedia, IT consulting and disaster

recovery” (ICTA, 2009). Although this definition is in conformity with international

nomenclatures, there may be a lack of a comprehensive overview of the statistics of the ICT

sector in Mauritius. This issue arises especially when dealing with the ITES subsector and its

related business process outsourcing (BPO) aspects. Due to the fact that BPO activities such

as shared offices and back offices are activities that are either of a general service type (e.g.

human resources, finance, logistics) or sector specific (e.g. travel, banking, insurance), these

activities may not be represented by the ICT statistics provided by the CSO. Already in the

NICTSP 2011-2014 (p.31), it was recognized that some BPO activities were excluded from

the CSO’s ICT statistics and were in some part included in the general services sector. To

supplement this apparent gap, the Board of Investment (BOI) through its IT and BPO

department has tracked independently the statistics related to ITES and ITS, in an attempt to

better assess the contribution of this sub-sector. This issue although critical to the evaluation

and determination of ICT progress is not one that is unique to Mauritius. Official statistics for

ITES and ITS are generally difficult to source or inaccurate, mainly due to “definitional

issues and the relative novelty of the field” (Doniger and Sudan, 2009, p.103). ICT statistics

for Mauritius are scattered throughout different reporting agencies, ranging from the CSO,

NCB , BOI, to industry associations. Although, there has been the adoption of standard

indicators for ICT and modified definitions, there still seems to be a lack of complete

representation of the sector or a ‘one-stop’ data location.

Nevertheless using the available ICT statistics, the sector can be described as one the

youngest with a potential for growth: characterized by several new entrants yearly and a

considerable contribution to GDP79. In the words of the Minister of Finance, it is “… one of

the emerging sectors…” and “…its growth is one of the highest” (Budget Speech, 2013,

p.10). For the period of 2012, ICT contributed 6.5 per cent of value-added to GDP with value

added at 19,625 million MURs (CSO, 2012). It was initially projected that the sector would

contribute at least 7 per cent value added to GDP80 in 2012, however, adjusted figures for

both 2011 and 2012 show that the “weight” in GDP has stagnated at 6.5 per cent since

79 CSO’s GDP contribution includes ITES/ITS 80 Speech of Minister of ICT at IST Africa Workshop on 15 November 2012, accessed February 2013,<http://mict.gov.mu/English/Documents/Speechees/Speeches_2012/ist_africa.pdf>

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201081. For the period of 2004 to 2012, the growth rate of the sector has been on average 14

per cent, with the lowest growth of 9.5 per cent reported in the period 2010 to 2011(see

Figure 25 and Table 10). This slowed growth is most likely as a result of the worsening

global economic conditions. Although, the current growth is lower than previous years, it still

represents one of the highest growth figures for any of the sectors in Mauritius.

Figure 25: Value added in ICT Sector as % GDP82 and growth rate of ICT sector

Source: CSO data

Table 10: Value added of the ICT Sector (in Million MURs)

2004 2005 2006 2007 2008 2009 2010 2011 2012 Value added of the ICT Sector (Million MURs) 7,565 8,600 9,960 11,714 12,994 15,412 17,240 18,450 19,625

Source: CSO data

The number of firms in ICT has increased and by extension employment figures have

increased significantly from their 2004 values. According to the CSO the number of large

firms (with more than 10 employees) operating in the sector in 2011 were 137. On the other

hand, the BOI estimates that there were approximately 500 firms in the ITES/ITS subsector

in 2011 and 575 in 2012. As a result of this disparity in the data the employment figures for

the complete sector are difficult to determine. The CSO disregards small firms with less than

10 employees and as previously mentioned the CSO definition of ICT omits several firms

(those involved in training and education in IT) which function in the ITES/ITS subsector.

81 Previous statistics recorded contribution to GDP at 6.7% for 2011(CSO, 2012; BOI, 2012). 82 CSO’s calculation of GDP contribution comes from ‘manufacturing activities, telecommunications services, wholesale and retail trade, and other activities such as call centers, software development, website development and hosting, multimedia, IT consulting and disaster recovery’.

72

For the period of 2011 CSO employment figures were 13,116 and the BOI estimates for the

same period were 16,800 in the ITES and ITS sub-sector (see Table 11). According to the

NICTSP 2011-2014 (p.31) employment should be much higher than what is currently

referenced. Calculations combining the ITES and ITS sector with large organizations

operating in ICT - such as retailers and telecommunications - produce a figure above

20,00083. Already, in 2010 OTAM and MITIA had approximated overall sector employment

between 15,000 and 20,000 (NICTSP 2011-2014, p.32).

Table 11: Employment in ICT sector

Source: CSO data; BOI, 2012 * estimates of the CSO exclude several firms that operate in the ITES/ITS subsector; large establishments are those with 10 or more employees Turning to external trade, the volume of ICT exports reflect the level of international

competitiveness of the industry. For Mauritius total ICT exports have never exceeded 9 per

cent of total exports (CSO data), in 2011 these exports (ICT) accounted for only 2.9 per cent

of total exports. As illustrated in Figure 26, the sector’s exports in the initial phases were

dominated by the export of goods, nonetheless, since 2008 services have become the main

contributor to ICT exports. ICT service exports now contribute, 93 per cent of total ICT

exports. Although, ICT service exports contribute the largest portion to ICT exports, they are

yet to attain 5 per cent of the total Mauritian service exports. This figure may be higher if the

complete ITES/ITS sector is included. Even with this low contribution to overall service

exports Mauritius is still a net exporter of ICT services with 2,116 million MURs surplus in

2011. However, when comparing Mauritius to key ICT service exporting countries, the figure

is quite shy from countries like India whose ICT service exports contribute almost half (47

per cent in 2010) of the country’s total service exports (WDI data), similarly in 2010

countries like Philippines, El Salvador, Romania and Costa Rica all recorded a more than

15% contribution of ICT service exports to total service exports (WDI data)84.

83 Calculations based on data provided from the NCB 2012 ICT directory 84 Doniger and Sudan 2009 identified these countries as key ICT exporters. It is important to note here that WDI figures do not necessarily include ITES/ITS statistics.

2004 2005 2006 2007 2008 2009 2010 2011 2012 Employment in ICT sector* (estimates large establishments only)

6,150 7,410 7,970 10,170 11,250 12,360 12,826 13,116 -------

Employment in sub-sector ITES/ITS only 2,392 3,801 5,513 6,960 10,440 11,437 15,000 16,800 17,700

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Figure 26: ICT exports as a % of total exports

Source: CSO data

Sector Composition

Subsequent to the overview of the key macroeconomic data related to the sector, it is

important to identify and highlight the contributors to the ICT sector. The sector as per its

definition comprises of both goods and services. This is then further subdivided into

manufacturing, wholesale and retail of ICT goods, telecommunications and ITES and ITS.

The segment which is critical to this analysis is that of services related to ITES/ITS, as it is

considered the dynamic growing ICT subsector. However, to understand the contribution of

these services to the sector it is important to have an overview of all contributing factors.

Additionally, due to a lack of disaggregated data, general sectoral trends will be included in

some parts of the discussion. To illustrate the major components of the complete ICT sector,

a basic cluster map is elaborated (see Figure 27). This basic cluster map includes the main

elements of the sector and the relationships which exist. The elements which spill-in to the

sector as well as the spill-over into other sectors are noted. Members of each sub-sector listed

are denoted in the same color to indicate their level. Besides this, contributions in each level

based on value-added or number of firms (relevant for listed subsectors of ITES/ITS)

correspond to the size of the relevant sub-sector shape.

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Figure 27: The Mauritian ICT sector

Sour

ce: Authors’ concept

- Goods vs. Services

As illustrated in Figure 27, the sector is initially subdivided into those segments which

provide either goods or services. The element of goods includes manufacturing and the

wholesale and retail of IT hardware and software. Since 2004, there have been several

changes to the dynamics at play. Particularly, the sector has seen a shift with respect to the

importance of its goods component. The previously indicated division of exports alluded to

the fact that the industry has become service dominated. The comparison of the contribution

of goods in ICT exports from 2004 to 2011 illustrate the diminishing role it plays. The share

of ICT service exports increased from less than half of the value of total ICT exports in 2004,

to now being over 90 per cent of said exports (see Figure 28). A closer examination of the

ICT export statistics demonstrate that from the period 2010 to 2011 there was a generous 48

per cent increase in export of services moving from a value of 3,128 million MURs to 4,630

million MURs, by contrast goods have not experienced this upward trajectory.

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2004 total exports 2,336 million MURs

2011 total exports 4,988 million MURs

Figure 28: Export of ICT Goods and Services 2004 vs. 2011

Source: CSO data; BOM, 2012

Moreover, total industry turnover shows the declining trend of goods which in 2004

contributed 42 per cent to industry turnover and in 2011 this was just over 30 per cent85. This

combined with the lowest sectoral turnover growth rate of 2.2 for the period 2010 to 2011,

emphasizes the reduced goods oriented nature of the sector (NCB, 2012).

- Telecommunications

Telecommunications was the former main contributor to value added in ICT, in 2004 it

accounted for 66 per cent of value added in the sector (CSO data). By 2011 this figure was

down to 43 per cent. The average annual growth rate for the period 2004 to 2011 was 5.7

percent (NCB, 2012). Although fully liberalized since 2003, the telecommunications market

is still dominated by the formerly state operated Mauritius Telecom. Mauritius Telecom is

now majority owned by France Telecom (40 per cent since 2000) with the government of

Mauritius owning a sizeable 33.4 per cent of the company86. The market is characterized by a

few market participants with a slowly growing number of internet service providers. The

number of service providers are listed in Table 12. In 2010, Mauritius Telecom controlled

approximately 95 per cent of the market and had an estimated 360,000 of the 387,700 fixed

telephone lines (NICTSP 2011-2014, p.38). Of the total 10,600 million MURs revenue for

telecommunications in 2011, Mauritius Telecom was earning revenues of approximately

7,900 million MURs87.

86 Mauritius Telecom homepage, accessed February 2013, <http://www.mauritiustelecom.com/about_us/index.htm> 87 Mauritius Telecom homepage accessed February 2013, <http://www.mauritiustelecom.com/about_us/index.htm> and NCB indicators portal accessed February 2013, <http://www.gov.mu/portal/sites/indicators/ICTeconomicList.html>

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Table 12: Telecommunications service providers

Type of service provider Operators No. of

operators

Fixed-line telephone service Emtel Ltd.; Mauritius Telecom Ltd.; 2

Mobile cellular service

Cellplus Mobile Communications Ltd. (subsidiary Mauritius Telecom); Emtel Ltd.; Mahangar Telephone Mauritius 3

Internet service 17

of which providing service to the public 12 Source: ICTA, 201288

- ITES/ITS

A closer inspection of the data sheds light on the growing ITES/ITS segment or as it is

referred to in Mauritius the ICT-BPO segment. The ITES/ITS segment experienced a tripling

of its turnover from 2005 (from 2,580 million MURs to 12,095 million MURs), and in 2011

the turnover exceeded that of telecommunications. In light of these changes, ITES/ITS has

been consistently marked with increases in its overall contribution to sector turnover and by

2011 it was contributing 36 per cent to sector turnover, 4 percentage points more than the

previous sector leader – telecommunications (NCB, 2012)89.

Following the above discussion, ITES/ITS has a significant weight in the overall ICT sector,

contributing roughly 45 per cent to the sector’s total value added90. Outsourcing which is the

momentum pushing this segment, has increased significantly since 2005 and this has been

translated into an annual growth of the island’s industry (NICTSP 2011-2014). There are at

present 575 firms operating which participate in the different sub-divisions of ITES/ITS. This

value represents a more than five times increase in just 8 years from the figure of 72 firms in

2004, an estimated average annual growth of over 30 per cent as illustrated in Figure 29. Out

of these 575 now operational firms there is almost equal participation of both local and

foreign investors, with participation being 49 per cent and 51 per cent respectively. The most

dominant foreign investors are those from Europe (36 per cent), of which the majority are

French and British. Furthermore, this investment trend correlates with the main markets

served. Nonetheless, with the worsening economic conditions in Europe the focus is now

switching to non-traditional markets such as North America, Australia and Africa (BOI,

88ICTA webpage, accessed February 2013,< http://www.icta.mu/telecommunications/licences.htm> 89 NCB Indicators Portal, accessed February 2013,<http://www.gov.mu/portal/sites/indicators/ICTSector.html> 90 NCB Indicators Portal, accessed February 2013,<http://www.gov.mu/portal/sites/indicators/ICTSector.htm>

77

2012, p.14). In addition to this, there is a considerable share of firms servicing the local

market with 23 per cent of all firms dedicating services to local industries91.

Figure 29: Number of Firms in ITES/ITS segment

Source: BOI, 2012

The 575 firms are characterized by four broad categories, namely BPO voice (75), BPO non-

voice (150), Information Technology Outsourcing (ITO) (276) and ITS (75) as presented in

Figure 30. BPO as it signifies here are either companies offering voice services in the form of

call and contact centers or non-voice services in the form of back office processes (internal

business functions), shared office92 and other BPO activities. These services are usually the

lower to medium value added activities which require large volumes of employees. Albeit the

basic nature of some BPO non-voice services there are certain industry specific applications

which entail going beyond low end “rule- based” activities to higher end “judgment-based”

and “strategy-based” processes associated with Knowledge Process Outsourcing (KPO)

(Everest, 2009, p.35). These higher end services range from business analytics, business

consulting to legal services, usually requiring good judgment and higher employee education

levels. In 2009 Everest (p.33) reported that 11 per cent of BPO service employees in

Mauritius were performing tasks related to KPO such as data management, business research

and information services. ITO is yet another level of services. These are usually of a

transformative nature and include software development, web design and development,

animation, game development and remote infrastructure management. Finally, ITS as

considered by the BOI refers to disaster recovery centers, business continuity centers, data

91 It is important to note here that most firms service more than one market. 92 Shared services refers to the provision of a service by one part of an organization or group where that service had previously been found in more than one part of the organization or group.

78

centers, training, consultancy and technical helpdesks93. The hierarchy of ITES/ITS is

illustrated below in Figure 30. For small countries like Mauritius with limited population

size, it is essential to provide a combination of services which provide to niche markets of

higher value-added and simultaneously provide the necessary low to medium value added

activities to absorb the workforce in simple semi-skilled jobs, so that greater gains can be

made from ITES/ITS industry.

Figure 30: ITES/ITS hierarchy

Source: Adapted from BOI

The number of firms in each segment has varied considerably throughout the years. With the

evolving emphasis of the sector, the addition of several ITO companies proves in good stead

that the sector is developing and providing higher value added services. In the initial phases

of the sector the concentration was heavily on low value added services of the BPO nature

(this is still a major player, however positive increases in other forms of services provide

evidence that a switch is slowly taking place), today there are increasing numbers of new

entrants who are providing services which are more of a transformative nature. At present,

many new entrants are joining the software, multimedia and website development segment

pushing the value of ITO firms to 48 per cent of the market, a change from having just 28 per

cent of market participants in 2006. The evaluation here is purely based on the dynamic of

the number of firms operating in the sector. The segmentation of the market as it were in the

years for 2006, 2011 and 2012 is represented graphically below in Figure 31.

Figure 31: Segmentation of the ICT-BPO sector based on number of firms for selected years 2006, 2011, 2012

93 BOI BPO Brochure and BOI Newsletter 2012

79

Source: BOI94

Due to data limitations, the switch to a higher volume of ITO firms has not be evaluated

based on turnover or value-added contributions of these new participants in comparison to the

BPO firms. The change in the number of firms may not then truly represent the contribution

to the sector. For example, the segment for BPO voice and non-voice combined, now

represents 39 per cent (compared to 69 per cent in 2006) of firms in the sector but it is home

to some of the largest players in the sector such as Accenture, Ceridian and TnT Business

Solutions UK. This is supported by the employment data which shows that these firms are

some of the main employers; employment data for the three firms combined generate 2,344

employment places which accounts for roughly 13 per cent of the total ITES/ITS

employment95. The BPO segment (both voice and non-voice) currently represent almost 80

per cent of the total 17,700 ITES/ITS employment. Turning to the ITO and ITS subsectors

there have been increases in the employment levels related to the entrance of new firms with

a 12.8 per cent increase in employment from the period of 2011 to 2012 (BOI, 2012, p. 13).

However, the scale of employment and operators in this segment are still not at a level

comparable to that of its BPO counterparts.

While Mauritius by most accounts is still providing many low value added services, the trend

is moving towards a shift from continued investments in call centers to new entrants focusing

on the ITO segment. Everest in 2009 (p.35), drew attention to the fact that there were already

signs of niche high-value added services being offered as there was evidence of a growing

number of operators offering legal process outsourcing, market research and finance and

94 BOI data sourced from BPO Secretariat Brochure 2006, BOI Newsletters for 2011& 2012 and BOI ICT-BPO directory 95 Based on data provided from both the NCB ICT directory and BOI listing of ICT-BPO firms

80

account reporting. Also, within the ITO segment some firms such as the Mundo publicis

group have extended their services from basic desktop publishing to high end digital

solutions focusing on quality and value added rather than mass production (Publicis Groupe,

2011).

There is much discussion concerning the general growth and potential of employment in the

ITS/ITES segment. As previously mentioned, overall employment in this segment was

recorded at 17,700 for 2012 (BOI, 2012, p.13). Different estimates exist for the future

prospects of ITES/IT with respect to employment. Some officials have suggested that the

sector would be able to create 15,000 new jobs by the year 2015. This signifies that

employment levels would exceed 30,000 by 2015. Officials at the NCB however, believe that

there would be 50,000 employees in ITES/ITS over the next 5-10 years; this is a more

moderate consideration, although this may still be excessive (Sector Interviews, 2012).

Indeed, if this level were to be achieved employment figures would be well above those

figures recorded for the second largest employment sector - the textile industry - in 2012

(41,89896), but with a workforce of relatively higher skills level. However, on inspection of

the employment trend since 2005, though a positive upward trend if the current momentum is

maintained employment figures reach only 25,000 in 2015 and below 40,000 by 2022, falling

short of both estimates (see Table 13).

Table 13: Employment in ICT-BPO Sector 2004 to 2022

2004 2005 2006 2007 2008 2009 2010 2011 2012 2015* 2022* ICT BPO sub-sector 2,392 3,801 5,513 6,960 10,440 11,437 15,000 16,800 17,700 25,000 39,000

Growth rate of Employment

59% 45% 26% 50% 10% 31% 12% 5%

Source: BOI, 2012 * estimation based on extended trend-line from data for 2004 to2012

Not surprising, the majority of the employment stemmed from the few large service

providers97. By contrast, the numerous small firms (with 50 or less employees) accounted for

less than 20 per cent of all ITES/ITS employment98. Nevertheless, much of this sub-sector is

characterized by small, even home run enterprises with less than 10 employees (Sector

Interviews, 2012). Although, this is the employment pattern, Mauritian government officials

deem ITES/ITS as an opportunity for young people to achieve employment and as an avenue

96 CSO 2012 – however, please note for this figure it refers to establishments with more than 10 workers. 97 Less than 20 per cent of the firms, extrapolated from data from the NCB ICT directory 2012 data for 287 firms 98 Extrapolated from data from the NCB ICT directory 2012 data for 287 firms 57 per cent of the 2011 market

81

that will help cure the scourge of high youth unemployment which currently stands at 20.5

per cent99. According to the World Bank (2012), ITES/ITS are directly linked to increases in

youth and female employment which are the sub-groups faced with the highest

unemployment levels in Mauritius. If Mauritius were to have the experience of the

Philippines or India, this segment would play a key role in the employment of women and

young people. These two leaders in ITES/ITS both employ large numbers of young and

female workers with over 50 per cent of the industry’s workers representing the respective

groups in both India and The Philippines (World Bank, 2012 p.16)100. The Mauritian

ITES/ITS has been following a trend similar to these well established locations with the

median age of the workforce in the sector being 26 as of the ICT-BPO Salary Survey of 2010

and 54 per cent of the workforce was recorded as being female as of the previous Salary

Survey of 2008. Although these trends seem to address the issue of youth and female

employment, the alarming evidence is that the unemployed youth and females may be unable

to meet the skills demands of these firms as a large proportion (47 per cent101), of the

unemployed are persons who have not attained secondary level education, thus very unlikely

to be absorbed into the ITES/ITS industry.

99 This is the value for the 3rd quarter of 2012 as per Statistics Mauritius 100 In Philippine ITES/ITS 60 per cent are females in India 70 per cent are between the ages of 26 and 35. 101 This is the value for the 3rd quarter of 2012 as per Statistics Mauritius

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iii. SWOT Analysis

For the ICT sector to truly flourish there is need for well adjusted strategies which are

coherent with the internal and external environment in which the sector operates. In order to

assess the true potential of the sector, an awareness of the strengths, weaknesses,

opportunities and threats is critical. To this end the SWOT analysis presented below in

Table 14 will be discussed.

Table 14: SWOT diagram ICT sector

The Mauritian ICT sector has developed thanks to the continued commitment of the

government and its use of amenable policies to enhance the sector. This can be considered to

Strengths Weaknesses

Amenable government approach to the

sector’s growth

Adequate ICT ecosystem

Availability of appropriate infrastructure

Availability of skilled employees for certain

segments

Favorable Time Zone

Talent pool limited in size and skills

Little appreciation for global ITES/ITS

“work-culture”

Low level intra-sectoral linkages &

collaboration

Relative low emphasis on high-value

added services

Opportunities Threats

Large untapped global outsourcing market

Opportunities of niche markets

Possibilities of strategic alliances

Potential of ICT hub

New potential markets

Sourcing Professionals from abroad

Increasing and new international

competitors

Continued development of well

established locations

Brain-drain of qualified trained

workers

Global slowdown

Reduced government financial

contribution to sectoral programs

83

be one of the major strengths of ICT. Through its many regulations and policies the

government continues to build an adequate framework to attract investors to the island.

Moreover, the general business environment fostered lends to ease of business and generally

favorable conditions102 for foreign investors. As the government continues to address the

deficiencies in the sector, it is possible that some of the current weaknesses may be assuaged.

Further to this, the environment for ICT has now become equipped with appropriate

infrastructure and connectivity opportunities. Although, this can be expanded, investors are

offered considerably well functioning business parks with reliable electricity and connectivity

to international bandwidth gateways. The recent additional connection to the LION2, gives

Mauritius the redundancy gateway103 that many other analyst highlighted as an industry

drawback. The government must be given credit for its efforts which have resulted in

Mauritius becoming a globally acclaimed IT outsourcing location.

The talent pool in Mauritius is of a curious nature due its limited size and capabilities.

Although direct skills with respect IT services may be lacking, there are segments were there

is a labor pool advantage. The small labor pool is able to offer services in both French and

English and these capabilities differentiate the Mauritian service sector from other markets

(AT Kearny, 2011). Additionally, there is a general ease of employability of secondary level

certificate holders. Based on estimations by Everest 2009, employability of secondary level

graduates for entry level positions is much easier in Mauritius than in other well established

locations. Further to this in specialized areas that would allow for higher value-added tasks

Mauritius has in some segments a certified professional base that is internationally

recognized (Mistry and Treebhoohun, 2009, p.96), particularly, in the fields of law, finance

and accounting.

In contrast to these positive aspects, there are key constraints affecting the ICT sector in

Mauritius. One constraint which has been aired by industry participants and observers since

2001 and still persists in 2012 is that of the limited workforce, in terms of size and skills. In

2010, The BOI estimated that there would have been 3000 additional posts in the sector but

the existing labor pool would have been unable to meet these requirements (NICTSP 2011-

2014, p.10). The quality of human capital is critical to the success of the ICT sector (WBG,

2012, p.17) and as previously explained Mauritius suffers from an overall low level of 102 Range of tools used to attract investors for example: speedy delivery of occupation (work & live) permits, free repatriation of profits, 100 per cent foreign capital allowed, no minimum capital requirement, refunds on training programs, etc. 103 UNCTAD (2007); Mistry and Treebhoohun ( 2009); NICTSP 2011-2014;

84

tertiary graduates. This is especially worrying as Mauritius wishes to attract investors who are

looking for high quality, specialized niche services. Moreover, this lack of apparent critical

high level skills in the sector has negatively affected Mauritian firms, as they have been

unable to secure both international and some large scale national contracts due to this

limitation ((NICTSP, 2011, p.19; Sector Interviews, 2012). The modification required here is

thus a major upgrade in the current education on both the tertiary and certificate level so that

individuals will have the appropriate skills required by the market (Vashista, 2011). Such

changes although already in discussion at ministry levels, entail considerable lag times

(Sector Interviews, 2012).

The ICT industry especially the ITES/ITS segment is known for its global nature. With this in

mind, firms and employees operating in this sector must have a global mindset and be able to

work within this timeframe. In Mauritius there is general lack of the “work-culture” of

ITES/ITS companies (Sector Interviews, 2012). Mauritius is called on by Mistry and

Treebhoohun (2009, p.118) to have a more ‘hard-work’ than a ‘work-to-hours’ ethic. The

sector is plagued with the lack of readiness of the workforce and the general environment to

adopt this attitude of conducting business outside of the core working hours.

Strong linkages in industry allow for knowledge sharing, pooling of talent and strong

representative sector associations (WBG, 2012). Alliances and partnerships are crucial

characteristics of the ICT industry. Probably, the most grueling task for the ICT sector would

be to provide better linkages between the many small companies in operation and the large

companies, to ensure that there is some platform for downstream and upstream linkages

within the sector itself. Furthermore, for the industry to meet growing demand and to

adequately address human resource concerns, and to show significant size and scope to win

international contracts there needs to be cooperation between SMEs, which make up a large

part of the sector. The lack of collaboration amongst sector participants can be linked to the

poor representation of the industry by its trade association for ITES/ITS. OTAM one of the

main industry associations is estimated by sector officials to represent about 20 per cent of

the firms in the sector (Sector Interviews, 2012) and Mistry and Treebhoohun (2009, p.86)

put this figure even lower at 15 per cent. Sector representatives are optimistic that the sector

would move towards consolidation and small independent operators will regroup into larger

organizations to bring their expertise and knowledge together and to benefit from economies

of scale (Sector Interviews, 2012). However, this is not envisioned to happen within the near

future.

85

Closely linked to the human capital transformation is that of the type of services provided.

Mauritius needs to transform its scope to a concentration on high-value added services. Due

to scalability restrictions and lack of competitiveness on markets with scale advantages, the

island needs to promote itself as a ‘high-value’ location. The focus should thus switch to

these segments and reduce investment in further call center activities. The NICSTP 2011-

2014 acknowledges this and sees the greater contribution that this focus can make to the

economy. The focus should be directed on services such as legal, financial, accounting and

research and development (NICTSP 2011-2014, p.47). Mauritius has a pool of skilled

workers that it can tap into for the higher value added processes in the fields of finance, law,

medicine and tourism (Mistry and Treebhoohun, 2009). Additionally, services such as cloud

computing and data centre services rely much less on labor force quantities. The

government’s focus on Mauritius to become a centre for application developers and cloud

computing (Data island) demonstrates the realization that these areas will bring about more

value to the sector (Budget Speech, 2013, p.11). Addressable would be the need to improve

privacy and cyber security issues to give investors the necessary insurance of protected

activities (NICTSP 2011-2014, p.11).

The weaknesses of the sector can be exacerbated by the threats to the sector’s success. With

ITES/ITS being a largely untapped market, many developing countries are attempting to

position themselves as key market participants whether on a regional or global scale. This in

essence poses a threat to the existing, burgeoning participants such as Mauritius. If there are

advances in locations such as Kenya, South Africa and Morocco which allow them to gain

advantages in skills level and prices, there will be a valid threat of low-end providers

relocating to these destinations. Additionally, with worsening global economic conditions

cost may become a key determining factor with respect to choice of destination. The

unfortunate result of a relocation of large call centers or BPO operators would be a

considerable number of persons being left unemployed in Mauritius.

The two major opportunities which present themselves to Mauritius are the possibility of

forming strategic alliances with other countries and the exploration of new potential markets.

Through historical and cultural links Mauritius should be able to leverage better cooperation

and investment opportunities with particular countries in Asia, Africa and Europe.

Cooperation with strategic partners from these regions could provide for greater training

opportunities, innovative solutions, higher investment, further visibility and credibility to

86

attract other global players. UNCTAD (2007) suggests creating solid ties with India to help

define the Mauritian ICT landscape. There are already instances where India is used as a

source of training. Infosys is one such example as it uses its Indian headquarters to train its

Mauritian staff (UNCTAD, 2007, p.24). This gives support to the idea that the seemingly

easiest (to facilitate) and most beneficial partner with respect to expertise and knowledge

would be India. Through the selection of Indian ICT companies as potential partners

Mauritius may be able to experience the skills transfer that it usually lacks when

collaboration takes place on contracts which are usually for the sole purpose of ensuring that

local firms are seen as credible by the contracting agent (NICTSP 2011-2014, p.19). Further

to this, the current emphasis on software development and the goal to act as an incubator for

application developers gives greater incentive for Mauritius to position itself as a key partner

to India in order to gain from its software development expertise.

The potential of new markets especially that of Africa is a somewhat contentious issue. Some

view the possibility of Africa being a new market, as an idea yet to develop with no

immediate fruition, whilst other observers view it as an opportunity for Mauritius to take

charge of first mover advantages104. The Minister at the ICT-BPO conference 2012 which

was entitled “The Next Stage of Growth for ICT Development – Harnessing the Potential of

Africa” proclaimed that “It was time for Africa”. This declaration came as an illustration of

the vast untapped potential that the continent has for the ICT-BPO industry and its positive

growth trends with real GDP growth rates for SSA estimated to remain above 5 per cent in

2013105. Considering, the deteriorating conditions in Europe, Mauritius has to explore new

possible markets for its services and for those who view Africa as this opportunity, there exist

many advantages. The proponents of this believe that Mauritius already holds a strategic

position as it is a member of several trading agreements106, has signed several DTATs with

African countries, enjoys close cultural and historical links. Present are few but still

Mauritian companies on the market such as State Informatics Limited that has subsidiaries in

both Namibia and Zambia, and 8 per cent of the ICT-BPO operators are already servicing

African markets. On the other hand, the more cautious and detractors of this idea, believe a

strategy of “taking advantage of Africa” leaves out consideration of the complications of the

individual markets. Even though Mauritius is regionally accepted as an African country it is 104 Mistry and Treebhoohun (2009), State Informatics (2010), Minister of ICT (2012), Sector Interviews (2012) 105 IMF Regional Economic Outlook accessed February 2013, <http://www.imf.org/external/pubs/ft/survey/so/2012/car101212b.htm> 106 Participation in regional trade agreements – SADC/AGOA/COMESA/IORA/ACP

87

not well integrated because of its geographical location and ethnic composition. By extension

for many African countries large contracts such as those of government agencies are offered

heavily on the basis of close relationships and solid market presence which Mauritian firms

do not possess (Mistry and Treebhoohun, 2009, pp.115-117). However, the more prudent

approach for Mauritius would be to host multi-national co-operations wishing to do business

in Africa but wanting to maintain their headquarters and specific services in a stable

environment with a good legal framework and recognized rule of law. Thus, Mauritius could

be a hub for services ranging from outbound marketing, collection centers to KPO, data

analytics and research in both French and English markets for those servicing the African

markets.

iv. Conclusion

Since the establishment of the MICT in 1995, the ICT industry has solidified its place in the

Mauritian economy. The current emphasis and expansion of the ITES/ITS subsector show an

interesting trend in the new outsourcing service orientation of the sector and the potential of

Mauritius to tap into a continually expanding global market. The government’s focus on

building the appropriate enabling environment has caused the sector especially the ITES/ITS

segment to attract major global players and by so doing has contributed to overall

employment, GDP and to a small extent exports. The industry has developed thus far that it

now requires a shift in emphasis and improvement in capabilities both with regard to the type

of services provided and the skills of its talent pool. These changes coupled with continued

developments in the ICT environment would bring about greater opportunities to have the

proper mix of high-valued services reliant on the talent pool and less labor intensive services

reliant on robust infrastructure. Prospects for further employment in the industry need to have

consistent public and private sector support for the training and re-shaping of the Mauritian

labor force. There is much room for Mauritius to continue to benefit from the ICT sector,

however smart adjustments and a focus on those segments that would produce the most

favorable outcomes for the country are critical to this success.

88

V. Conclusion

In this paper we have identified the financial and the ICT sector as current growth drivers of

the Mauritian economy and attempted to analyze their potential impact on the economic

growth prospects of the island. The findings are based on the historical development path and

the determinants that enabled Mauritius to its unique growth story. One of the underlying

reasons for the development is certainly the high quality of political and economic

institutions that ensured political and social stability and enable the interaction of factors for

the economic success. Interestingly, this stable basis might also be reason to avoid a potential

‘middle-income trap’. As some of these initial growth factors like the sugar wealth or trade

preferences have vanished, this deeper determinant is even more important to realize its well-

known vision to be the hub for trade and financial flows between Asia and Africa and vice

versa.

One key sector for this vision is the Mauritian financial industry that experienced a

transformation from a domestic banking business towards an international financial center

due to the introduction of offshore sector in the early 1990s. Currently, the financial industry

is mainly characterized by the dominance of its banking sector and the massive investment

flows that are rooted via Mauritius. Hence, the growth potential can be found in the

expansion of local banks towards African and Asian markets and the up-grade of services

associated with international financial flows. So far, these global business activities are

mostly limited to low-value-added services like accounting or administration and thus have

only minor contribution to GDP. Mauritius might therefore engage in higher-value adding

activities like wealth and asset management or like treasury and risk management in order to

benefit more from these international financial flows. However, the lack of skilled labor and

the fact that these financial flows are mainly based on Double Taxation Avoidance Treaties

might limit the growth prospects significantly.

The other potential growth sector is the ICT industry, one the youngest sectors in Mauritius;

its growth is fuelled largely by the dynamism in the ITES/ITS sub-sector. ITES/ITS has

attracted global players and has contributed significantly to the country’s GDP and

employment. To further promote the growth trajectory it is essential that there is a switch of

emphasis to high value added services combined with a focus on new non-traditional

markets. Markets such as Africa and North America may present new opportunities for this

sector. Although, the sector has been performing well, its overall contribution to exports is

89

still low, with a switch to offering both traditional and new markets higher value added

services such as business analytics, financial and legal services the ITES/ITS segment could

have a greater impact on exports. Unfortunately, similar to the constraint of the financial

industry the lack of a skilled workforce is damaging to the expansion of the sector. Current

focus on re-training and educating the potential workforce for this sector is well placed but its

benefits might only be realized in the long-run.

Although both sectors, financial intermediation and ICT, have clear growth prospects that are

also supported by large governmental commitments, both industries have only a marginal

impact on the current account deficit of close to 10 per cent of GDP in 2012 that emerged

with the downturn of the traditional export sectors textiles and sugar in the 2000s. Even

though the IMF (2012) ensures that reserve assets remain at a comfortable level, due to strong

FDI inflows, the estimated current account deficit of -4 per cent in 2017 is still below the

historical level of minus 0.7 percent during the growth period between 1984 and 2004 (WDI

data). Hence, the focus for the further development of the financial and the ICT industry has

to be also on the creation of higher exports.

However, the current macroeconomic problems also make clear that the major risk for the

continuation of Mauritius’ extraordinary growth story might not even be the specific risk

within the strategic growth sectors, as analyzed in this paper, but the balance of payment

constraints associated with the current account deficit. Especially, as the negative effects of

the structural changes in the 2000s on unemployment, trends in inequality and educational

system are still unsolved, the answers to these structural problems might be the major key to

sustainable growth for Mauritius.

90

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Appendix I

Many investors use the possibilities of tax structures in Mauritius for their investments into

India or other Asian and African countries. Based on the regulatory framework, investment

holdings, collective investment schemes and close end funds have to use GBC1 companies.

For instance, a FDI investment from a third country into a country holding a DTAT with

Mauritius can benefit from tax reductions and exemptions and repatriate profits mostly tax

free to the third country. It is important to note that all DTATs are bilateral agreements with

different characteristics. An example for an investment into a company in Mozambique is

illustrated in the following figure:

Figure I: Typical Mauritian Investment Scheme

Source: Authors and Impara, 2012

Although some DTATs eliminate taxes on dividends, interest rates and royalties, most of the

agreements have only a reduced tax rates. With Mozambique a with-holding tax (WHT) of 8

per cent on dividends instead of 20 per cent is valid. In general, there is potential tax savings

of 5 to 20 cent in most cases. Officially the world income of GCB1 companies in Mauritius is

15 per cent.107 However, if GCB1 holdings elect to provide written evidence to the

Commissioner of Income Tax showing the amount of foreign tax paid in the country of

investment, this foreign tax can be deducted from the tax amount in Mauritius. In the case of

a Mozambique investment, the 32 per cent corporate tax and the 8 per cent WHT tax can be

107 Since 2010, GCB1 companies can also conduct business with Mauritian residents. Profits from these activities are also subject to 15 per cent tax. However, foreign tax credits are not applicable which make these activities less attractive.

96

used to reduce the tax on dividends in Mauritius to nil. In other cases without the foreign tax

evidence, 80 per cent of the foreign tax credit can be used and the tax burden can be reduced

from 15 per cent to 3 per cent. The same scheme is valid for investments with debt

instruments as the tax incentives are also valid for interest payment. Additionally, and most

attractive for equity and other funds, capital gains are not subject to tax if the DTAT is valid.

Hence, many equity funds investing in India and Africa use Mauritius as platform as there are

substantial tax savings from 30-35 per cent compared to the usual capital gain tax in these

countries. The repatriation of such gains is not subject to any WHT in Mauritius.

Publisher: Competence Center “Money, Finance, Trade and Development “ HTW-Berlin – Treskowallee 8, 10318 Berlin Prof. Dr. Sebastian Dullien, Prof. Dr. Jan Priewe http://finance-and-trade.htw-berlin.de

ISSN: 2192-7790

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